134460713 - 1_pb0ksdel - PID 1851201 >> Jay Powell today at the IMF, when is the Fed going to taper? More importantly, when the easy inflation calms are over what then? What does that mean for stocks? To break that down, I have Peter Bookvar, CIO of Bleakley Advisory Group and Editor of The Boock Report. Peter, always a pleasure to talk to you. I was just telling you before you came on how I pumped the [inaudible]. I make a viewer in that every two weeks I get the chance to talk to you, pick your brain and I'm really interested in what you have to say. >> Enjoy your competitions. >> Yeah, and let me tell you that one of the reasons I wanted to pick your brain is as I read your newsletter, the Boock Report, I don't know how familiar other people are with that and where or maybe you can give a little plug as to where they can find that. >> Our websites are B-O-O-C-K reports. Find my last name. Some people can trial it. They can subscribe and just hear my daily messages on medieval grow, economy and markets. >> Yeah. I think they're great because you talk about the numbers, what's happening in the economy relatively unfiltered, I would say. Today that the number that I was looking at that I wanted to pick your brain on was the jobless claims number. As you know this particular recession we've had numbers that actually in aggregate, every week we'd have to wig almost every single week except one, maybe two weeks recently, have been higher than the highest number ever in this entire series going back to 1967. We went down last week below that level and here we are back again at 744,000 which was much more than expected. What are you thinking about these numbers? Why is it that we're still at 744,000? Initial claims now a year into this and what does it mean for the economy going forward? >> Well, it is a little confounding because you have to look at, so that's obviously measuring the pace of firings and then obviously the continuing stuff for how long people are receiving them. What's it's difficult to square up is that now this is somewhat dated, but we got a couple of days ago the job openings number for February. Now, of course, claims is through the last week, but through February we're up to 7.4 million job openings. Not only is that above where we were in February 2020, but you have to go back to 2019, the last time we had that many job openings. How do you square that many job openings with still very high level of firings? Now I can better explain why the number of people receiving continuing claims is still very high between regular continuing claims, which in its reporting is delayed by a week, and then those still receiving continually pandemic assistance and the emergency assistance. If you add up those three, we're talking about 17 million people that are still receiving benefits of some sort. For contexts in January and the heart of the winter, it was about 16.4. Here we are with the vaccines getting rolled out, with job openings very high, you still have a very high level of those still receiving continuing claims and use that to ask question is whether the enhanced unemployment benefits and the edit $300 a week is causing an issue. I directly know that it is. I was on the phone earlier today with a friend who runs a local swim school that I'm involved in, and have a Dustin, where he's complaining to me about the difficulty of finding people. Now he's hiring kids in high school, kids in college in their early 20s, and he's having difficulty finding people more so now than when the unemployment rate was at 3.5 percent pre COVID, and you just have to wonder if it is because of the competition with those benefits. In one year I hear well, people don't respond to that. They want to go back to work. Yeah, many people do, but for others, if it means waiting till September because that's when these benefits go until maybe they will or maybe it'll just take their time and finding work or they just feel less urgency. But it is going to be a factor in how quickly businesses can ramp up if they can't find the people, and no question. There's also a skills mismatch between the job openings and the pool of available labor. There's also, of course, the issue with kids that are still at home for school where you need one parent to be home, so those are the factors here. But this is a growing issue and I think a problem, and that's why I think the participation rate is going to remain low even with this recovery, and it's why I think that wages are going to surprise to the upside, because companies are going to have to pay more to entice these people or some people to come back to work. >> I think that's a good point in terms of the inflationary impact or that leaves the positive impacts if you're for earnings. When you mentioned September was a time frame the first thing that came to mind for me honestly, was they waiting until the majority of people are vaccinated. The reason I'm thinking that is, I got the first shot of the Pfizer vaccine today. Really, the vaccination in America is going so well now that it's just a matter of time before we open up without any real concerns about spikes in corona virus cases. At that point we're going to see whether or not, what the economy looks like. When I think about these numbers, I think to a certain degree that even once we open up, there's going to be some residual change in terms of small businesses, in terms of places that you have close contacts like restaurants, travel, etc and perhaps some of the jobless claims are associated with this change that we're going through, that we're still churning through trying to figure out what the new normal is. >> I agree. A lot of people that were hired or employed pre COVID in leisure and hospitality, well, they found other work. I read an article in the Wall Street Journal couple weeks ago, and they talked about concerts that are trying to restock their employees for hopefully late summer into the fall and hiring roadies and stage people and so on. Well, when you shut down the concert business, a lot of these people found other work, and they're staying in that other work and they're not coming back, so they're having difficulty finding people. There's no question that there's going to be friction here in normalizing both in terms of businesses coming back because there are many in that sector that are not going to come back unfortunately, but also bringing back you're seeing people and you're not going to bring back all of your same people. You're going to have to bring back some of them and find the others elsewhere. >> Yeah. Before we transition to the market side of things today, I wanted to say that I was looking at Jamie Dimon. What he had to say, a lot of people are talking about this, that the chairman and CEO of JPMorgan Chase came out saying, hey, I'm not talking about how long this economy is going to be in recovery an up cycle, but the boom portion of this economy, that is this pent-up demand portion where we have really high GDP growth is going to last potentially through 2022. He's talking about boom times for another year and a half going forward. First of all, do you think that's actually true? If so, what does that mean? >> Well, I'm confident that we'll have a boom in the next three-quarters. I think the problem with analyzing 2022 is that a lot of the fiscal spending that has occurred expires this year. There's not that same ramp up, now there's the hope that you pass the baton on to the private sector and you hire a lot of people back in, the economy runs on its own, but there is a fiscal hangover that takes place next year and we'll see how impactful that is. Also you're not just going to get a boom in interest rates even notwithstanding this rise, are just going to sit there. We're going to see, I believe, and other rate higher in interest rates. I think come late summer into the fall, you're going to start hearing the Fed talking about tapering. You even heard from a few European Central Bank members this week that talked about the possibility of them tapering in the fall. Imagine the interest rate scenario around the world if the Fed and the ECB are contemplating or even punch through on tapering. Can you then get a fiscal cliff next year? I think it's way too early to think that the boom will continue in 2023. If you see that was happening because that means higher interest rates, a taper, lower stock prices, fiscal cliff next year, which we'll see how that reverses horizon rates, but I'm not comfortable going out that far. I'm comfortable saying the next three quarters will be very good and not looking past that. >> Yeah. When you talk about rates being a big key toggle there, I would agree with you and then that's how I'm thinking about things right now. Maybe that's my bias, but I think that really nothing's going on right now in the market. That's how I would put it in terms of, we had this huge run-up in interest rates, the worst quarter since 1980 for treasury bonds. But then when you look at today, we've slid back from the 175 level. I think if I look at the 10-year US Treasury, it's trading actually below 163. It's at 163 on my screen. That's very positive for technology stocks that have DCFs with the terminal value, very important. You look at the Nasdaq up one percent, S&P up less, the Dow up even less. What are the dynamics that are underneath all of that? How are rates affecting not just the economy and bonds, but also equities? >> Well, we've had this just very rotational type market. It's been by tack sell everything else like in 2020 and then it was so tacked by everything else for a large part of this year. Then you tell me where the 10-year is in the morning, I'll tell you where the Nasdaq futures are going to be and vice versa with the S&P at the Russell. It's just this constant rotation, but with respect to rates, we've got from 90 basis points to 175, 177, and backed off to 162. The market still has essentially raised interest rates three times the shear, three-quarter point moves along it. I think we need to have perspective here with the markets gripping to new highs. I understand that the simplicity sometimes of thought is that the economy is getting better, buy stocks. The economy go back, sell stocks. Well, if any market better and knows that it's not that easy because it's just things aren't that easy and a lot of the interplay is related to rates and monetary policy and so on. 2020, everyone celebrated low rates and celebrated what the Fed was doing, but now with rates rising, I've heard this many times going back to the '90s. Oh, it's okay. The rates are rising because it's rising for good reason. When you have such interplaying sensitivity between stocks and interest rates and the economy and interest rates and the economy and stocks, rates rise for good reason until it no longer as good reason and things starts to break and we are going in that direction. We just haven't hit that yet. Now maybe we did temporarily 177 and the 10-year and now we've obviously people are breathing a sigh of relief that we've backed off, but to me this is just temporary. We priced in the easy come inflation rates that we're going to see over the next couple of months. That's why the 10-year is probably going to state contingent here and a range of cold, maybe one and half one and three-quarters by come June, July, August, when I believe that the inflation stats will still be printing three-tenths, four-tenths a month, proving that the rate is not transitory. Well, that'll be the setup for another like hiring rates, but again, that's not going to be for a couple of months. >> Yeah. But I think that make sense. >> In the short-term, stats will transition to focusing on earnings and at least those companies that are in the manufacturing space, we'll see to what extent they're sensitive to the whole supply chain upheaval and rise in cost pressures and inability to get parts and having to pay for transportation and what that's going do to profit margins. We saw in the Nikkei Asian newspaper that Apple's having difficulty making enough Max and iPads, they can't get enough parts. That has an impact on earnings, which the stock market doesn't think it will, but I think you're going to hear more about that in the coming months. >> When you talk about impacts on earnings immediately, I was going to go in another direction, but I immediately think of what I would call the corporate tax grab because basically this is what's happening with the headlines. We know that the Biden administration is now receptive to the concept of a global minimum tax to stop tax avoidance by large multinationals. To me, what this means basically is that if you google, if you're Pfizer, you can domiciled in the Netherlands or in Ireland or wherever it might be, and think that you can avoid tax is going to be a minimum level. When we talk about a hit to earnings, there's the potential that we're in a situation where there's a paradigm shift in terms of how governments are thinking. They're thinking we want to spend money in order to boost the economy and we're not going to deficit spend. We're actually going to make sure that there's tax revenue to deal with that spending and we're going to get it from somewhere and that somewhere has to be the corporates. That seems like where we're going both in the United States and elsewhere in Europe and the developed world. Do you think that that's actually where we're headed? If so, what impact will that have on earnings? >> Yeah, we're back to the civil tax and spending philosophy. . We know where that got us last time. I mean, people try to understand that the multiplier effect of government spending is typically below one, so you get less for every dollar in return that you spend. Therefore, that's the basis for the debate about keeping that money in the private sector or handing it over to government. Here's an example. For those that live in New York, the Tappan Zee Bridge, they knocked it down and they built the Mario Cuomo Bridge. This bridge has cost $3.8 billion for a three mile bridge and the contractors are suing the state in New York for another 800 million because of cost overruns that they had not reimbursed for. Let's just say there's as much as it cost them, the New York 4-1/2 billion dollars, 4-1/2 billion for a three mile bridge where they could have taken a fraction of that money in every year for the last 30 years focused on maintenance and fixing things that broke. I mean, people that live in a house, you don't knock it down every 10, 15 years because things break, you hire somebody to fix it. I'm giving this example to point out the inefficiencies of a government spending when you hear about infrastructure. The Obama trillion dollar so-called stimulus plan back, in '09, when things weren't shovel-ready. I live in New Jersey, there's a road called South Orange Avenue and I would go down it every day to take the train into the city and this road which is many miles, fell under this American Recovery and so on I forgot the rest of what they called it and the road was repaved. Then, two years later it needed to be repaved again. That's not much return on your money. Cities and states are repaving roads every day anyway. Again, I'm bringing this up to point out just the high inefficiency of a lot of government spending. I'm not saying we don't spend it, I'm just saying that there are ways of doing this in a much more efficient way through maintenance rather than brand-new construction. Let's look at airports. You cannot buy- >> You are forgetting one thing that with the Tappan Zee Bridge, it's probably worth at least a billion dollars and it's called the Mario Cuomo Bridge now, so you got that part of it there. >> -well, yeah. It'll end up 4-1/2 billion for the Mario Cuomo bridge, where it would have cost a fraction of that if you spread out maintenance and fixed it over the past bunch of years, just as again, you're not knocking down your house every 10 years because you need a new roof, you just replace the roof. Airports, you can't go buy a stock in a US airport. You can't. Ironically, the privatized airports or partially privatized airports are all outside the US. When you hear a politician comparing US infrastructure versus overseas, well, yes, the US has some privatized toll roads, and you can buy stock in companies that manage it, but it's outside the US that has most of the privatized toll roads. You can buy a stock in countless international airports, Sydney Airport, Zurich Airport, Vienna Airport, the Frankfurt Airport, Heathrow, Beijing Airport, Shanghai Airport, you can buy airports in Brazil privatized airports, you can buy stock in Mexican airports. Well, when you have a profit motive, these airports tend to be much more modernized and a lot nicer than many of the airports that we have in the US, but you won't have any conversation whatsoever on the concept of maybe privatizing some US airports. It's just pack and send them more money. >> Very interesting. But you know, that is where we're headed. We are headed it seems to me toward a situation where at least to jumpstart the economy. The real question is how long is this period going to go on and how much is it going impact corporations? Because if there's a tax grab to be had, given populism, I don't think that the middle and the working classes are going to bear the brunt of that. >> Well, to the concept of Janet Yellen writing an editorial in the Wall Street Journal today and going around talking about a minimum corporate tax, you really think Ireland which lowered their corporate tax rate to 12-1/2 percent, to lower business is going to say, "Sure Janet, we'll raise that up to 25 percent just as you want it." No freaking way. It's complete nonsense. This is already of competition, raise our tax and hope everyone joins us rather than keeping our taxes low and that are competing against everybody else. It's completely backwards. >> Well, I have two other issues that are market-related that I'm thinking about. One is margin debt. I think I sent you the thing from the Wall Street Journal about, you look at three different periods that are comparable one today in terms of the amount of margin debt increase that we've had vis-a-vis the previous year and the other two periods that are comparable are 2007 and 1999. We know that both of those periods proceeded very difficult times in the market. Are you concerned at all as you think of yes, the economy is booming, but wait a minute, hold on, are you concerned that this margin debt is fodder for potential market correction? >> It's important to look at margin debt not in itself because it's just an absolute dollar number, but looking at it compared to the market cap of stock market, or looking at it, or relative to GDP, relative to GDP, yes, it's at a record high. But you can draw a chart with margin debt overlaying the S and P and they pretty much follow each other. But yeah, that will be a problem and it will matter when it does. Obviously it mattered for that hedge fund of last couple of weeks that owned Viacom in discovery and others, where they got obviously way over their skis. So yeah, no matter when it does, it helps to exaggerate the move to the upside and it'll exaggerate the move to the downside. It's just a question of what the trigger points are for a change, but I mean that's what you get when there is another search for yield and money is cheap and people ride the momentum and this is what you get. I mean, central bankers are the bar tenders behind the bar and gets everyone drunk,and some people can make it home safe, and other people can get themselves into an accident. >> A lot of people are talking about this now I think Scott Minerd, he's talking about this. I see some other bond investors who were talking about the Vix, the low volatility that we have right now and that even though we're about to go into a potential boom, the increase in this speculative nature sparks as an example. That's all telling you that we're in a frenzied market environment. What are your thoughts about the potential for a correction even though we're about to go into a potential boom. >> Well, the S&P is 20 percent above where it was in February 2020. We've already priced in a lot of good news. We've already priced in the 2022 earnings recovery, because earnings in 2020 are not going to be that much higher than where they were in 2019. Some context and perspective here, I think is important of where the market is today relative to where it was before anybody knew with COVID was. >> As the last thing to say, what do you do in that case? I mean, asset allocation was what we're talking about. We're talking about an economy where interest rates maybe taking a pause, where we could see higher inflation numbers two or three months from now and we've already baked in a lot of the gains in the equity market. How does one position oneself in that environment? >> I think from trading/investing standpoint with stocks, in my opinion, people have two choices to be successful right now. When you see a rotational market like this, it's a great trading market. For short term traders, I think this is a good environment. I'm more of a long term investor, which allows me to focus on the day to day, talk the macro day to day, by having longer term themes that helps me block out a lot of the short term rotational noise. I think if your trading style is anywhere in between, this is a difficult market. It's a maddening market. I would stay on either side of that as having a very short term time horizon, or having a much longer time horizon. Again, because everything in between, we're turning to such an extent now we're staying in the headline indices because underneath that's the climb line topped out already. Underneath there's a lot more chop and I expect that chop to continue notwithstanding the possibility of a correction here and there. You look at the sentiment numbers this week, you have in the AAAI numbers today, you had bulls at the highest level since the first week of January, few weeks before the vomer gating blowup happens, you have bears at the lowest since 2019. In the industrious intelligent numbers we saw on Wednesday is bulls back above 60, which I consider extreme. It's spread to bears is now back above 40 with bears in the 16 range. You look at daily sentiment index, you look at the relative strength index and you had Tom Thorn on yesterday talked about the demarks, the Vix at 17, you have daily sentiment index and the Vixs very low. You are setup for a pullback here with all these different things. I just don't know whether that happens tomorrow or it happens in two weeks. >> You as someone who is long term bullish, at least for the next three quarters, is that a pull back that you buy the dip on or is it something that you think still 10 percent down? We're still actually 10 percent above where we were in February 2020. >> Well, I'm bullish on the economy the next three quarters. My concern is that inflation and interest rates are going to surprise to the upside which then you transition to the possibility of taper talk late summer and that's going to create a real difficulty for equities, I believe irrespective of the underlying economy. Yeah, I'm bullish on the economy, I'm much more suspect on markets here for those reasons stated. That said, I'm still a bit long focused more on precious metals and energy stocks and agriculture stocks and uranium and international markets that I think are cheaper and much more attractive and have better secular stories than many overvalued US stocks and I'm going to value stocks. I'm sticking with my allocation in those areas at the same time owning some tips and having some cash as dry powder, but knowing that this is not going to be an easy ride because as I've said with you before, I'd really believe that we have entered into a new interest rate regime even though again, rates are still low on an absolute level, I get it. But the rate of change is something worth of note and that we're potentially in a new inflation regime. Not high inflation, but higher inflation rate. We have to understand that the bond market, now if yields were 2, 2.5, 3 percent in the tenure, that is a level of rates that can better absorb any readings of inflation that's persistently 2.5, 3, 3.5 percent. But because rates are so low around the world, we're not positioned for any upside surprises in inflation. We're not positioned for 2.5-3 percent where looking back 30 years, we would have loved to 2.5, 3 percent inflation considering where we came from in the late 70s. So you combine in high-er inflation possibilities with extraordinarily low interest rates, that's just not a good combination. In a market that is trading at 23 times this year, 20 times 2022, there's no room for error. >> Yeah, well said Peter. I hate to leave it on that sour note but it makes a lot of sense, buyer beware. >> I think I like to say that as you tell a kid, just be aware of your surroundings when they're going out at night, any investor always has to be aware of their investing surroundings. That relates to sentiment, valuations, the rates market because we know how intertwined the equities are with rates and monetary policy and so on and we just have to be just aware of our investing surroundings and understand that investing is not always so easy. >> Yes, let's talk in two more weeks, see where we are then and go from there. >> Sounds good. Thank you. >> Thanks again.