Trading Copper and Gold in a Recession Welcome to Trade Ideas. I'm Jake Merl, sitting down with Peter Boockvar, CIO, Bleakley Advisory Group and editor of the Boock Report. Peter, great to be back on the show. Thanks, Jake. Always good to be here. So 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've weak economic data, the yield curve is inverting, the stock market is selling off, people are saying we're entering a recession soon. So what are your thoughts, Peter? What do you think markets are telling us right now? 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 in 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 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 bleeds the economy of capital. Therefore, they are just spitting in the wind in terms of hoping to generate faster growth. So you throw on the Fed tightening, the lack of any stimulus oversees, the China 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 been somehow able to get out of it. So when you look at today there is this belief, okay, yeah, the Fed's going to cut, it's not going to help though, and we think about stimulus, the government makes a deal with you when they create stimulus, whether it's fiscal or 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 the central banks are basically trying, they are basically shooting blanks at this point, and as I said earlier, actually doing damage now in Europe and Japan. The question with the Fed is, does Jay Powell and company take the evidence of the experience overseas and say, "Okay, market will give you some of your rate cuts. Okay, Trump will 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 it terms of QEs like, oh, yeah there's plenty treasuries for us to buy. So that's his do something instinct, that's his own institutionalized, I'm in the Fed, I drink that Cool 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, I again, I don't think rate cuts are going to do anything because the cost of capital is not an inhibiting factor in anything. I mean, for those buying a house, the bond market just ease policy by 100 basis points for you, and the only thing that stimulator was revised has done little to stimulate purchases because the average person is saying, "Well, rates aren't down because things are good, things aren't softening, therefore, I need to be nervous and reign it in, and affordability is a major problem of multiple years of excessive home price growth. So I would be cutting rates to no less than one percent. I would basically say, "One percent 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 are in. Therefore, investors need to re-evaluate PE multiples because there's 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 into 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 a wished the price. So in terms of the timing the end of this cycle, how close do you think we're actually to a recession? So I get asked that question all the time, when will we have the recession, and I argue where manufacturing and trade, we're 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 float 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. So 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 by 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 spillover 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 them on the trucks and delivering it to their end points. 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 there are less people on the road, well, 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, there can be a kumbaya and we can somehow regenerate confidence again. Because a lot of it is at least right now a confidence that is then now affecting business decision-making. But it doesn't look like he's going to pull that back. It doesn't look like there's going to be any potential for a ideal. So I'm afraid that this is going to continue. So 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. Finally. After quite some time. Yeah. 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? So I focus 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 even with this reduction in demand, there are 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 5-10 years, a voracious buyer of copper, and that trading in 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, and for all these, to me today, the recession fears are the greatest. It's hard to make this case for copper right now because the trade is not going to work if the globe is going to go into recession. So the way that I sort of danced around it rather than saying go out and buy copper was, Southern Copper was a name that I liked because it's paying a five percent dividend and its cost 80 cents a pound with the price of copper now about to 2.60, and that I was willing to ride 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 in a lot of copper mines are going to get cut even more. So you're really setting ourselves up for a voracious bull market at some point. It's just from a trading standpoint, it's not worked, and for all, I call them high 30s, now to low 30s. So for the short-term trader, you can say, I'll cut my losses at a 20 percent decline. For those with a long-term perspective like myself, any decline in copper, I'm going to buy the stock at, and I'm specifying the stock. I'm not interested in buying copper futures, I'm not interested in buying free port, 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 mean, I'm expecting copper to go to four or five dollars a pound from 2.5 to 2.60 now. So yeah, maybe copper goes back to two, but the upside to me is much greater than the downside. So you're saying right here right now Southern Copper trading around $30 or so, you'd be buying the stock right there? Yes. Buy more. But people have to understand that, again, this is a very cyclical downturn we're in. But I emphasize 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, my portfolio is usually much smaller than my secular ideas that I have. It just so happens that my recent ones for Real Vision have been more of the commodity, more cyclically impacted ideas. So how much upside I guess over the next two to three years do you see for Southern Copper? 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 mean, I think you'll get at least a double from here in Southern Copper, and their dividend could be somewhat variable, but at least right now it's paying about a five percent dividends. 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? Well, in a short-term trading basis, my stop when I gave the last idea, I would've stopped out. Correct. Yeah, I believe it was three dollars or so. Yeah, it was down at these levels. Stopped out at 20 percent decline. Right. Which when you're dealing with a 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 pull backs 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 you know 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 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 so I'm willing to ride out the situation. 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? Well, I would be in the short-term swapping if you wanted to be out of that copper trade. To me gold and silver, this is just the beginning of something more, and when I say just the beginning, gold is already up 50 percent 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 gold and silver ratio will compress, leading to a lot of upside in the price of silver. So 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 of the Fed 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 is obviously easing. The dollar is hung 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 1,375 level which I mentioned last time, and to me, now you're looking at the September 2011 highest. Silver got to 50, now it's 17. So you have a lot of upside in silver as well. So in the short-term, that's where the trader 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 in a more difficult situation in the short-term because of the cyclical demand issues that it's now experiencing. 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. Thanks, Jake. So Peter is still bullish on precious metals and copper. He recommends traders buy gold and silver for short-term trades and suggest investors buy shares of Southern Copper, ticker symbol SCCO at current levels. He thinks the stock could double over the next few years.