Trading Copper and Gold in a Recession
Featuring Peter Boockvar
Published on: August 19th, 2019 • Duration: 16 minutesPeter Boockvar, CIO of Bleakley Advisory Group, believes that we’re on the cusp of a full-blown recession — and in this interview with Jake Merl, he discusses what that could mean for metals markets. Boockvar revisits the secular bull case for copper, highlights the recent price action in gold and silver, and makes a suggestion for how traders should position themselves at this point. Filmed on August 15, 2019.
JAKE MERL: Welcome to Trade Ideas. I'm Jake Merl, sitting down Peter Boockvar, CIO of Bleakley Advisory Group and editor of The Book Report. Peter, great to have you back on the show.
PETER BOOCKVAR: Thanks, Jake. Always good to be here.
JAKE MERL: We've got a lot going on in markets right now. There's $16 trillion worth of negative yielding debt. The Fed is cutting rates. We have weak economic data. The yield curve is inverting. The stock market is selling off. People are saying we're entering a recession soon. What are your thoughts, Peter? What do you think markets are telling us right now?
PETER BOOCKVAR: Well, it seems so long ago, we only had 12 trillion of negative yielding bonds. It's amazing how fast we're accelerating this process. And it's almost two things that are feeding on each other. It's legitimate slowdown and growth that leads to expectations of more central bank easing. And then we get more data that leads to weaker growth that reinforces the expectations of more easing.
But when I say easing, all I'm saying is lowering interest rates. I don't believe that what the European Central Bank or Bank of Japan is now doing is technically easing. I actually think it's restrictive. And it's something that I've said on a previous Real Vision interview, is that the Europeans and the Japanese are destroying their banking system. And as they do that, it further police the economy of capital, therefore, they're just spitting in the wind in terms of hoping to generate faster growth.
You throw on the Fed tightening, the lack of any stimulus overseas, the China's slow down, and then you group that on with the tariffs. And we have the end of this economic cycle with a situation where central banks are not going to be able to save the day. Whereas pretty much in all the previous downturns, they've been able to ease policy, which then stimulated growth, and we've seen how able to get out of it.
When you look at today, there's this belief, okay, yeah, the Fed's going to cut. It's not going to help though. And when you think about stimulus, the government makes a deal with you when they create stimulus, whether its fiscal and monetary. On the monetary side, they're saying to you, I'll make a deal. And say you're saving money to buy that car or a house, I'll lower interest rates, and you promise me that you'll buy that car or house today instead of waiting till tomorrow.
Well, if rates are just low forever, you don't have that stimulating impulse, because you can just wait till tomorrow, because rates will not be any higher. And if anything, they can be even lower. So that's why there's really no more stimulus to be had even though these central banks are basically trying. They're basically shooting blanks at this point. And as I said earlier, actually doing damage now in Europe and Japan.
And the question with the Fed is, does Jay Powell and company take the evidence of the experience overseas and say, okay, market, we'll give you some of your rate cuts. Okay, Trump, we'll give you some of your rate cuts. But this is not the path down to zero. Now, unfortunately, Jay Powell, in his speech a few months ago, said, it's not if we go back to zero, it's when which shows that he's learned nothing. And then in terms of QEs like, oh, yeah, there's plenty of Treasuries for us to buy.
That's his do-something instinct. That's his institutionalized- I'm in the Fed, I drink that Kool Aid. That's the only thing I know, instinct. But we'll have to see whether it actually comes to fruition. Like if I was in his spot, again, I don't think rate cuts are going to do anything, because the cost of capital is not an inhibiting factor in anything. For those buying a house, the bond market just ease policy by hundred basis points for you.
And the only thing that's stimulated was re-fis. It's done little to stimulate purchases, because the average person is saying, well, rates aren't down, because things are good. Things are softening. Therefore, I need to be nervous and rein it in. And affordability is a major problem of multiple years of excessive home price growth.
I will be cutting rates to no less than 1%. I would basically say 1% is where we stop, and the chips will fall where they may. Now, I'm saying what they should do. Obviously, they're not going to do that, they're going to follow what the others have done. But I think that's the situation we're in. Therefore, investors need to reevaluate PE multiples, because there's an assumption, oh, the lower rates go, it's the discount rate for future cash flows, asset prices can go to the moon.
But the flip side is that cash flows are now shrinking. Margins are now receding. Earnings are now going to reverse. How much do you want to pay for that? Do you still want to pay 18 times earnings just because rates are low? No, I want to pay less than that. Because, as I said, rates will not stimulate growth. And all I'm going to be left with is a lower earnings piece at which the price.
JAKE MERL: In terms of timing, the end of this cycle, how close do you think we're actually to recession?
PETER BOOCKVAR: I get asked that question all the time. When will we have the recession? And I argue where manufacturing and trades were already in a recession, capital investment is bordering on a recession, particularly in equipment. On software, it's doing better. So really the only thing that's keeping us afloat is the service side of the economy and the US consumer.
And the question is, okay, what tips over the US consumer? Well, that'll be the labor market, that'll be wages, and that'll be the direction of the stock market. In the July payroll number we saw a few weeks ago, we're beginning to see a change in the labor market. So hours worked slipped, because when you're an employer and your business, all of a sudden, is more uncertain, the first thing you do is, okay, let me reduce the hours worked in my employees. I don't want to get rid of them. I like my employees, they're good people, they're qualified, but business is a little slow. So instead of working 40 hours a week, they're going to work 37 hours a week.
Well, if time goes and business doesn't improve and you need to protect your earnings, well, then you'll stop hiring. And then you'll eventually start to lay off workers. Well, then what's the spill over into the services sector? Well, look at the trucking sector, which is a service sector. Those trucks are taking everything that the manufacturers are making, putting it on the trucks and delivering it to their endpoints.
Well, we're beginning to see a slowdown in the trucking business. We're beginning to see bankruptcies and a reduction in hiring. Well, if these truckers are doing less miles, and then less people on the road, where they're stopping at restaurants less often. They're making less money.
So we're beginning to see the progression of how this is now spreading. And so all of a sudden, hiring slows down, consumers become less confident about their job, wage growth starts to slow down, then we lose that consumer support. Then all within this, the stock market will not be able to be kept up by the Fed. So you get a decline in the stock market.
Well, that affects consumer spending, because we are an asset price dependent economy. So as the stock market goes, so goes confidence. And you can really make a correlation between the S&P 500 and the University of Michigan consumer confidence number. So it's going to be a combination of the decline in asset prices with the economic scenario that I think, unfortunately, is unfolding.
Now, things could reverse. Trump can pull back the tariffs, and there can be a Kumbaya, and we can somehow regenerate confidence again, because a lot of it is at least right now confidence that is then now affecting business decision making. But it doesn't look like he's going to pull that back, doesn't look like there's going to be any potential for a deal. So I'm afraid that this is going to continue.
JAKE MERL: Given the current environment, how should traders position? I know you've mentioned a few different trades over the past few months. You've been long gold, which is finally started to work out for you after quite some time. I know you're excited about that one. And you've also been long copper, which is unique to be long copper in a slowing growth environment. I know you mentioned that last time. Can you please break down your copper trade and why it hasn't worked out recently?
PETER BOOCKVAR: I am focused on value right now. And one of the caveats I gave when I talked about copper was this is highly economically sensitive. This is going to be driven in the short term where China's growth goes and where global growth goes. That is the risk.
I was making the argument from a longer term perspective that the supply-demand imbalance is beginning to get out of whack. And that they're, even with this reduction in demand, there's still major supply deficits in copper. And that we were on the cusp of getting a secular shift in the demand drivers for copper away from the historical construction in China, for example, building apartment building after apartment building, and that solar, wind, electric vehicles was going to be over the next five to 10 years a voracious buyer of copper. And that trading and commodities, hugely volatile, of course, and you want to buy them when they're out of favor, you want to sell them when they're in favor.
To me today, the recession fear the greatest. It's hard to make this case for copper now, because the trade's not going to work if the globe is going to go into recession. So the way that I danced around, I'm saying go out and buy copper, was Southern Copper was a name that I liked because it's paying a 5% dividend. And its cost is 80 cents a pound with the price of copper now at about 260. And that I was willing to write out this demand destruction, you can call it, if the global economy goes into recession for this longer term supply-demand imbalance that's only growing. And if anything, you get a further decline in copper, expansion plans and all that, these copper mines are going to get cut even more.
So you're really setting yourselves up for a voracious bull market at some point. It's just from a trading standpoint, it's not worked. I call them probably high 30s, now, it's in the low 30s. So for the short-term trader, you can say, okay, I cut my losses at a 20% decline. For those with the long-term perspective like myself, any decline in copper, I'm going to buy this stock at. And I'm specifying the stock.
I'm not interested in buying copper futures. I'm not interested in buying Freeport. This is a company with a strong balance sheet that can get through any short-term difficult time because I know this is a big trade. I'm expecting copper to go to $4 or $5 a pound from $2.50 to $2.60 now. Yeah, maybe copper goes back to $2. But the upside to me is much greater than the downside.
JAKE MERL: So you're saying right here, right now Southern Copper is trading around $30 or so, you'd be buying the stock right here?
PETER BOOCKVAR: Yes, buying more. But people have to understand that again, this is cyclical downturn we're in. But emphasize a cyclical downturn. There's not a secular story that's negative here for copper. Copper is the most important industrial metal with the most attractive fundamentals over the next 10 years in terms of what it's going to be used for.
My commodity exposure in my portfolio is usually much smaller than the secular ideas that I have. It's just so happens that my recent ones for Real Vision have been more of the commodity more cyclically impacted ideas.
JAKE MERL: How much upside I guess over the next two to three years do you see for Southern Copper?
PETER BOOCKVAR: Well, if I'm right, and we do actually grow again globally, and this EV story really picks up steam, and copper does go to four or five because of the major imbalances that I'm seeing. I think you'll get at least the double from here in Southern Copper. And their dividend could be somewhat variable, but at least right now, it's paying about a 5% dividend.
JAKE MERL: And just in case things don't go your way and we do see this recession unfold, where would you put your stop loss for Southern Copper?
PETER BOOCKVAR: Well, in a short term trading basis, my stop when I gave you the last idea, I would have been stopped out.
JAKE MERL: Correct. Yeah. Got it, but this is around $50 or so?
PETER BOOCKVAR: Yeah, it was down at these levels, stopped out 20% decline which when you're dealing with the commodity, it's fine. I'll take that, because usually the upside is much greater. But because of what I see over time, I'm comfortable-- the mistake people make is buying on the dip in broken situations, broken companies and bad balance sheets, where you never recover that capital. I'm more comfortable buying on the pullbacks when I know I'm buying- not a broken story, but a cyclically impacted story. But a company with a good balance sheet that can survive the downturns, because then those stories rebound.
It's the value traps that you get into that you want to avoid. So it's not for everybody buying on the dip. Some traders, they should stay disciplined and to be out of the trade and wait for the story to get better in terms of the economic situation. I tend to be more patient. I'm willing to write out the situation.
JAKE MERL: Just in case traders or investors wanted to play more of a short-term thesis here, what should they do? I know you like gold, you mentioned copper, but what else can they do?
PETER BOOCKVAR: Well, I would be in the short-term swapping, if you wanted to be out of that copper trade- to me, gold, silver, this is just the beginning of something more. And when I say just the beginning, gold's already at 50% from its December 2015 bear market low. Silver though is barely above its low. So silver has a lot of catch up to do.
And silver somehow, some days, it's treated as a currency just as gold is. Some days it's treated as an industrial metal, where those economic worries filter in. I think over time, it'll be more grouped in as a currency than an industrial metal. And that golden to silver ratio will compress leading to a lot of upside in the price of silver.
I am really optimistic about gold and silver. And I've talked about gold and silver multiple times. But I remember last time I talked about it, it felt like everything was coming together- both in terms of the bear case disappearing, with the bear case was the Fed's raising rates and they're far away tightening more than any other central bank and that's good for the dollar, to now, the Fed's obviously easing, the dollar's hanging pretty well here, but gold is rallying in the face of that dollar strength.
And then you throw in this collapse in real rates, which the rise in negative yielding rate is another way of saying that. And then you have the technical story getting above this 1375 level, which I mentioned last time. And to me, now you're looking at the September 2011 highs. Silver got to 50, now it's 17. So you have a lot of upside in silver as well. In the short term, that's where the traders should have their focus. That's where the bull market is right now. That's where you want to buy dips. That's where you want to ride on the upside. The other stuff is copper is going to be more a difficult situation on the short term because of the cyclical demand issues that it's now experiencing.
JAKE MERL: Peter, bullish on copper, bullish on gold. We'll see how it plays out in the months to come. Thanks so much for joining us.
PETER BOOCKVAR: Thanks, Jake.
JAKE MERL: Peter is still bullish on precious metals and copper. He recommends traders buy gold and silver for short-term trades, and to just investors buy shares of Southern Copper, ticker symbol SCCO, at current levels. He thinks the stock could double over the next few years.