MAGGIE LAKE: Hello, and welcome to the Real Vision Daily Briefing. It's Friday, January 7th, 2022. I'm Maggie Lake. And here with me today is Peter Boockvar, the chief investment officer of Bleakley Advisory. Hi there, Peter.
PETER BOOCKVAR: Hey, Maggie, how are you?
MAGGIE LAKE: I'm doing okay, thanks, for the start of the year. Trying to try to keep track of everything that's going on. It has been a pretty busy one, a pretty volatile one. And then, of course, we had the big payroll number out today. The US unemployment rate dropping to 3.9%. Although the headline monthly payroll number was a little bit below expectation, I'd love to unpack all that in a moment. But we did see that 10 Year yield continuing to stay elevated, rising to 1.77%, and the rotation out of technology and risk continued.
The NASDAQ dropped another three quarters of a percent, actually ending off its lows for the day. Bitcoin failed with three-month low, trading down below 42,000. And Ethereum fell over 6%. An awful lot going on but focus on jobs as we kick off here. What jumped out at you from the jobs report?
PETER BOOCKVAR: Well, it was the household survey which well outperformed the establishment survey. The establishment survey showing the 199 relative to the estimate of 450, but it was the household survey that showed more than 600,000 jobs added. And the size of the labor force increase was much less than that, therefore, you got that 3.9% unemployment rate. And the all-inclusive U-6 rate fell four-tenths month-over-month to 7.3%. It was 7% in February 2020.
Also of note was the wage number. Average hourly earnings rose more than expected. And on a six-month annualized pace, wages are rising at a 6% rate. Now outside of a lot of the COVID data noise in April, May 2020, you have go back decades to see 6% type wage growth. That is very relevant. That is what has the Fed now worried about this wage price spiral that was characteristic of inflation in the 1970s.
MAGGIE LAKE: Yeah, the Fed has that dual mandate. It has price stability, so watching inflation, extremely important, keeping that in check, but it also has full employment. What part of this report given that you think is going to be most meaningful for the Fed? Is that average hourly earnings component that you think is going to jump out to them most or they'll put priority on?
PETER BOOCKVAR: Absolutely. If you sat down and you look at the stats today, and you say, okay, well, CPI next week is probably going to print north of 7%. Wages, as I mentioned, are running at 6% over the past six months, and the Fed is still expanding its balance sheet for the next three months. It's almost 9 trillion, and they've raised to zero.
You want to talk about offsides, but that's why of course the Fed is realizing that they screwed this up in terms of their timing, and they're trying to regain some of their credibility in terms of trying to catch up.
MAGGIE LAKE: Yeah. It's been an aggressive pivot, hasn't it? We were joking earlier in the week, when's the last time that the Fed minutes move the market so much, but they seem to have gone from being patient and waiting to almost everyone, even the dovish members getting on the inflation bandwagon. But the result of that is you've seen a dramatic move in bond yields.
I went back and looked. I think it was December 17th. We were at 1.40, around there. And now, we're at 1.76, 1.77 on the 10 Year. For bonds, that's a quick big move. Do you expect them to keep rising? What do you anticipate here?
PETER BOOCKVAR: Well, what we should do is we should compare the 10 Year yield also to the Wednesday before Thanksgiving, because it was that Friday that we all learned about Omicron. 10 Year yield on that Wednesday, I believe closed at about 1.64. A couple of days ago, we were essentially back to 1.64 as people realize, okay, Omicron's going to be not a big deal.
And while it's highly disruptive for a short period of time, we're going to get through this and hopefully, this is all the latter stages of COVID in the sense of being such a force in our lives. And then of course, what's carried us through that higher is the response function from the Fed that, okay, we got mugged by the reality, we were dead wrong. And now, we're going to try to catch up, and hence this move.
And, technically speaking, the 1.78 levels where we topped out in March, which was almost double where we were just a few months before that. This is a key spot. I think the market, at least the long end, is going to be going through this tug of war between the Fed tightening in response to the inflation that they're seeing and the wage gains and the tight labor market, which typically flattens the yield curve.
But on the other hand, we're seeing a global rise in long term interest rates, particularly in Europe. And that was very noteworthy today as well, is that the German 10 Year yield is getting back to near zero. The Italian 10 Year, all of a sudden is at 1.30. The Japanese 10 Year all of a sudden, it's at 14 basis points. Yeah, it's only 14 basis points but that's still a move and it's getting to the upper end of their yield curve control range.
This has been a global rate move, and I've said for a while that you can analyze US growth and inflation stats all you want but a big influence will be what happens in the European bond market. And we saw the European inflation numbers today. And headline inflation in the Eurozone's at 5%, the core rate's at 2.6%. And they still have negative interest rates, and they're still printing 80 billion euros a month.
The Fed's got a catching up to do. But certainly, the ECB has a lot of catching up to do, [?] on rates there and thus here.
MAGGIE LAKE: I have a couple questions off that. But you're right, and that a lot of people were looking at that European data, very, very closely. Are we in a situation where we could see positive yields for Germany?
PETER BOOCKVAR: We're a couple of days away from that, at least on 10 Years if this trend holds, and I think it will. The ECB is ending their pandemic emergency purchase program in March. And while they're going to mitigate some of the impact by increasing their conventional asset purchase program, their monthly purchases for the second quarter of this year are going to go from 80 billion euros to 40 billion euros.
And then the following quarter, it's going to get ratcheted down even more. Then at some point, they're going to debate, okay, how do we start the process of getting out of negative interest rates, which is a whole another problem and challenge of theirs, which would be dangerous for the world's bond market. But yeah, European bond yields are likely going higher and that means all other bond yields are likely going higher, particularly since the ECB has been the most extreme when it's come to monetary policy.
Now, you can say, well, maybe the Bank of Japan has been that way, but the Bank of Japan's balance sheet is growing at a much slower pace than it was. It is the ECB that is the most out of control central bank. What they do will matter a lot for global bond yields.
MAGGIE LAKE: Peter, what does this mean for the global economy? If you're in this synchronized, although at different paces, perhaps but environment where we are in a rising rate environment, can the global with economy withstand that? Is it strong enough? We know we have the inflation part that must be addressed, but what does that do to the growth part?
PETER BOOCKVAR: Well, that's the challenge. I wrote a note this week that said that monetary policy, markets and the economy are conjoined, fraternal triplets, and that they are all connected, and you can't separate them out. In other words, when monetary policy changes, that's going to have a direct result on markets and financial conditions. And because the stock market is such a huge driver of economic activity, it's going to then have an impact there as well.
And within that market's stories, not just stocks, it's where credit markets go and where interest rates go, and where credit spreads go. If we get this tightening of financial conditions, where I should say it's not if, it's as we get these tightening, because like I said, you get a tightening of monetary policy, it is going to spill over into financial markets. We're already seeing that particularly with tech stocks and a lot of other specular parts of the market. And then that is going to lead to a widening of credit spreads.
And then we're going to have a discussion about what this means for the economy. And yeah, we are headed for a slowdown driven by that or driven by-- we can have a debate on where fiscal policy is going to be this year and so on. But, yeah, we're headed for that because of what I just mentioned, and these conjoined triplets all working together in the opposite way that it worked over the last couple of years.
MAGGIE LAKE: Yeah, and I think people who are looking at that and saying, listen, I think we're slowing down already, it's going to continue, and maybe this is pushed to raise rates aggressively and aggressively get ahead of inflation is not inaccurate but maybe that should have happened already. Jared Dillian and Peter Atwater talked around this point in a conversation yesterday, where Peter wondered whether the Fed was lagging the economy rather than leading it. Let's have a listen to what they had to say.
PETER ATWATER: Yeah, so I've looked at the Fed as a pretty good lagging indicator of sentiment. It's a committee. It's a committee of bureaucrats and academics, and so as much as the crowd thinks that they're following the Fed, when you look at the behavior of the Fed, they are, I think, always a little bit of a step behind the crowd. I agree with you that when Powell conceded that it wasn't transitory, that to me was a significant indicator that, okay, inflationary pressures should start to ease, and I think we've seen that with supply chains.
We're seeing that in fuel. I think your instinct is right that the challenge here for the Fed is that they've having staked out now such an afraid of inflation bent, my concern is that they are going to potentially keep throwing water on a fire that was already beginning to extinguish itself. And that, to me, is the classic situation for a lot of policymakers is by the time they act, they're acting after sentiment has turned.
MAGGIE LAKE: That interview is on the Real Vision site available to Essential Plus and Pro tiers. Peter, what do you make of that, because he's not just saying they're behind the curve, and they need to be aggressive to catch up, he's saying that they're addressing a problem that's already going away on its own?
PETER BOOCKVAR: Well, I agree with him that they're late to the party here in terms of tightening. But even if inflation slows, that doesn't mean it's not a problem anymore. Because if it only slows to a rate of 3% to 4%, which is I think going to be the case, well, that's still a problem. And that's still well above the 1% to 2% that we've become so accustomed to pre-COVID.
And an analogy I would give is that if you need to get to a place but you missed the train, you don't then just go home, you're going to take the next train, you're going to take the train after because you still got to get to your destination. The Fed needs to get out of QE. They need to get off zero with respect to interest rates. Even if inflation is close to 2%, they need to get off zero. We need to get out of this deeply negative interest rate world and it's not going to be for a while that we'll see positive real interest rates again.
But they got to get off this March 2020 emergency monetary policy when we clearly are not in this emergency. And this is not going to end smoothly by any means. But that's the needle that the Fed's going to have to thread and that's the problem that they caused for themselves. But the answer is don't just sit there and do nothing now and watch inflation recede.
They have to start normalizing here to the point where something will break but something's going to break anyway in this process. There's no easy way out here and it's just pick your poison.
MAGGIE LAKE: Yeah. I was thinking as we were looking at the commentary for the Fed, they're now talking about hiking rates and reducing the size of the balance sheet maybe at the same time, pulling on all these different levels. What could possibly go wrong? Chances are something. Where do you think, if something's going to break, what do you think it is?
Where's the pain going to be most felt? Are we seeing it now play out in those high beta names, in technology, in that part of the equity market, or could it spread elsewhere?
PETER BOOCKVAR: Yeah, valuations now matter. And I think that that's being messaged clearly and it has been for months now when we see what they've done to these high multiple stocks, but that's typically the case when monetary policy changes. I think that this then starts to bleed into a lot of different things again, because let's break down monetary policy between QE and interest rate changes.
QE, the higher markets were not a symptom of QE. They were the direct impact and purpose of QE. Ben Bernanke wrote an editorial in the Washington Post on November 4th, 2010, when he applauded himself for QE1 lifting the markets off its lows and substantiated QE2 as one of the reasons why it would lift stock prices which in turn, would help the wealth effect, which would in turn with consumer spending, and blah, blah, blah, blah, blah. QE was specifically intended to lift and ease financial conditions. When QE goes away, by definition, it will tighten financial conditions.
It's just a question of how much of that tightening will the Fed tolerate? Where will the inflation rate be when they can't tolerate it anymore? In 2018, they were shrinking the balance sheet and raising interest rates. Well, Powell panicked when he got the 2.5% Fed funds rate and the stock market fell 20%. And just a few months later, he was already cutting interest rates. That was their pain point, a 20% decline.
That experience too tells me that they're not going to be doing both at the same time. And we had an interesting comment today from San Francisco Fed President Mary Daly, who does not vote, who was a big dove, who, ironically, yesterday said, well, I don't want to shrink the balance sheet until we normalize interest rates. And then she spoke again today and said, well, I don't want to shrink the balance until maybe after we raised twice.
Well, raising twice is not really normalizing interest rates, but maybe it's their new definition of normalization. But they're not going to do them both at the same time because of the 2018 lesson. It's going to be, let's end QE, let's get a couple of rate hikes under our belts, and then we can debate what to do from here depending on what the yield curve looks like. Because the Fed is definitely afraid of inverting the yield curve.
If the curve starts to flatten at that point in time, and the Fed still feels like they need to tighten, well then, they're going to shrink their balance sheet to try to steepen the curve. If the curve is already steep, because their inflation worries in the bond market is tightening for them, well then, they're going to continue to raise short rates. I think that is what they are going to be analyzing by after they get those first couple of rate hikes, like I said, under their belt after they end QE.
MAGGIE LAKE: Fantastic explanation, Peter, and I'm so glad you mentioned that because I did want to ask you about how much of the work is the bond market going to do for them? We haven't been in a situation like that in a while but that is extremely relevant. I want to ask you a question that we have coming through from The Exchange, from Oliver on The Exchange.
What are your thoughts on the housing market? On the one side, we have inflation that could help real assets appreciate, on the other, we have rising rates, equities pulling back and economic uncertainty? Could that cause less confidence in the minds of buyers? How do you see it working out in 2022?
PETER BOOCKVAR: Well, the heat of the housing market that we saw in the second half of 2020, and all throughout 2021, that temperature has peaked. And both in terms of housing purchases and transactions, and also the rental market. But we're peaking at extraordinary levels. The Apartment List national report yesterday came out and December actually on a month-over-month basis showed the first rental price decline. It's only two-tenths of the entire year, but year to date, rents are stalled 18%.
The rate of change according to S&P CoreLogic in terms of home prices is beginning to slow but it's still about 18%. But we've peaked in terms of that rate of change and we're going to start to soften because consumers, they can't afford this. Unfortunately, if you're renting, Real Page said this week that occupancy rates are 97.5%, they've never seen it that high. Usually, it's 95% or 96%.
Now, it may not sound like this much of a difference between 95% and 96% and 97.5%, but that's hundreds of thousands of people. Then you got to at least the single-family market, we also must watch mortgage rates because mortgage rates are going to slow growth. And if you get into a 4% mortgage rate environment, if that will slow housing dramatically more, because then that will also impact people's desire to sell. Because you have a generation of people that don't know what a four-handle is in a mortgage rate.
They only know two to three, so they may be more reluctant to move into a higher mortgage, rather than staying with their loan work. Now, of course, if a family needs to move, they're going to move. If someone needs more space, they're going to do it but it's going to have a dramatic impact, I think, on the pace of transactions if things go much higher from here in terms of mortgage rates, but yeah, we still may get price increases this year because inventory is very low, but that rate of change is definitely going to slow.
MAGGIE LAKE: Yeah, and as you pointed out, slowing from very, very elevated levels in no matter what part of the housing market you look at. When we're talking about the risk-off and the pain in the areas