Lead-Lag Live

Peter Boockvar on Market Volatility Drivers, CPI Implications, and Inflationary Investment Strategies

• Michael A. Gayed, CFA

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How do economic trends shape market volatility? Join us for an engaging discussion with Peter Boockvar, an expert in corporate bond research and investment management, as we unpack the complex factors driving the recent swings in financial markets. Together, we explore the impacts of the unwinding yen carry trades, the sudden shifts in bullish sentiment, and the critical role of technical indicators. We'll dissect the latest earnings reports from major tech companies, analyze the market's reaction to key economic data such as jobless claims and payroll numbers, and provide insights into the challenges facing today's economy.

What does the upcoming CPI print mean for future Fed rate cuts? In our examination of inflation trends and currency dynamics, we delve into the implications of CPI results on market expectations and the broader economic landscape. Peter shares his views on the nuances of disinflation and deflation, focusing on recent PPI reports and long-term trends in goods and services inflation. We highlight the cyclical nature of these economic forces and consider how disinflationary trends may pave the way for future inflationary pressures, alongside insights into the yen carry trade and central bank actions.

How should investors navigate rising debts, deficits, and persistent inflation? We explore strategic investment approaches in times of market volatility, emphasizing undervalued sectors such as European and Canadian energy stocks, uranium, and precious metals. Peter provides a bullish perspective on the growing middle class in Asia and potential opportunities in Macau casino stocks. We round out our discussion with the potential market impacts of the upcoming presidential election, the perhaps counter-intuitive benefits of a recession for gold and silver, and the long-term bearish outlook on treasury bonds. Tune in for a comprehensive analysis and practical investment strategies tailored to current economic realities.

The content in this program is for informational purposes only. You should not construe any information or other material as investment, financial, tax, or other advice. The views expressed by the participants are solely their own. A participant may have taken or recommended any investment position discussed, but may close such position or alter its recommendation at any time without notice. Nothing contained in this program constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in any jurisdiction. Please consult your own investment or financial advisor for advice related to all investment decisions.



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Speaker 1:

My name is Michael Guyatt, publisher of the Lead Lagrime Board. Joining me for the Rough Hour is Mr Peter Buchvar. Peter, a lot of people know about you and have tracked your work, but for those who are not familiar with your background, introduce yourself. Where are you? What have you done throughout your career? What are you doing currently?

Speaker 2:

So I've been at this for about 30 years, starting in corporate bond research at a firm called Donatson Ballanson, lufkin and Genret, which was then bought by Credit Suisse, and then I spent about 18 years on the sell side at a firm called Miller Tabac, in a variety of different functions, and then worked for Larry Lindsay, who was a former Federal Reserve governor and George W Bush's senior economic advisor, and then, in 2018, became the chief investment officer and portfolio manager on two strategies that I created at the Leakley Financial Group, and over decades I've been writing daily, whether I was on the buy side or the sell side and I forgot to mention that I was at Omega Advisors in between for a short period of time, but as part of what I did whether it was managing money or it was producing research I wrote every day and it's just part of my daily life, and I do that through a sub stack called the book report.

Speaker 2:

You can find that under my name, and it's just how I express what I'm seeing out there in the economy, markets and how they tie that into my investments, and everything is sort of integrated and it's a view of the macro, it's a view of the micro and a combination of anything that I find relevant.

Speaker 1:

It's been a lot to write about the last two weeks, if you like, but it all happened so quickly that if you started writing and you didn't publish it in time, it almost became irrelevant. Let's talk through what happened in the last week and a half and maybe just touch on the speed with which the narrative has been changing. We went very quickly from reverse carry trade, end of the world which I keep saying, the end of the world is the bull case to we're going straight up. That was it. The end carry trade is done. Was this all just like a random blip?

Speaker 2:

Well, things don't just come out of nowhere. What comes out of nowhere is the market's acknowledgement of things that have already been building Now. The yen side shorts have been building for the last couple of years. The Fed started raising rates in March 2022. That was quickly followed and coincident with the Bank of Canada, the RBA, ecb, bank of England, emerging markets central banks started raising rates in 2021. It was not until March 2024 that the BOJ finally decided to take us out of negative interest rates and then was followed up by the 25 basis point cut just a few weeks ago. So during that timeframe, the land of the rising sun and I like to say the land of no interest rates was sort of the epicenter of where to borrow cheap and not only to get the cost of funds cheap, but also, hopefully, doing that in a depreciating currency. So you can win sort of in two directions and then buying something that you think is going to outperform where the yen and the cost of capital is going to go in Japan. So that's been going on for years, but we had no idea to what extent only until it was revealed in this unwind. But there were other things that were sort of creeping around the markets as well. Early July you had the bullish sentiment that was literally off the charts. If you look at the city panic euphoria index, it was well into euphoria territory. You look at the Citi Panic Euphoria Index, it was well into euphoria territory. You look at the Investors Intelligence Numbers, which is a stat that I've been looking at since the early 1990s, and whenever I've seen a bull bear spread get above 40, I've always considered that extreme, and in early to mid-July that spread got almost to 50. Then you throw in extreme readings in the AAII individual investor survey, and so there are a lot of things that set us up for from a sentiment standpoint. Then, on a technical standpoint, the S&P 500, whenever it gets about 13% above the 200 moving average, to me that's a red flag for a time for a consolidation and or rest. And we got to 15% above the 200-day moving average in early July.

Speaker 2:

Then we started to digest a lot of the earnings, particularly from Google and Microsoft and Meta, and then was followed by Amazon and Apple, and people started to realize and even before the earnings came out people started to question whether it was a Goldman Sachs report or some other research reports that the return on investment on all the spend, right now at least, is very specious. And then we got earnings from those that I just mentioned and people realized that AI for many companies right now is an expense, it's not a revenue driver, and that expense clips your earnings. And these companies are spending now. Luckily they can afford it, but spending $15 to $20 billion per quarter is a lot of money that you need to drive a lot of income off that to get an acceptable rate of return. So that was also another thing and those stocks started to get hit.

Speaker 2:

And then I think what was very important was the Thursday Friday, the jobless claims, followed by the Friday payroll number, where, for the first time in the last couple of years, the market started to say you know what, maybe bad economic news is bad for the markets, whereas prior to that, any slowdown or any weak data point was good for the markets because people would say, okay, well, the Fed is just then going to cut interest rates and everything's just going to be fine.

Speaker 2:

So I thought those two days were pretty important in terms of the change in complexion in the market. So you bring all these things together and you see what we saw over the last couple of weeks Now. Since then, people are hoping that this yen unwind is closer to being done I've seen estimates between it being halfway done or 75% done but now we're shifting our focus, I believe, to the economic challenges that are growing. All you had to do is go through Q2 earnings whether it was listening to the calls or the transcripts and it tells you that we're in an ever-slowing economy. And while the market's rallying as we speak because of the PPI number, and we're getting this what I believe is more of a dead cap bounce, I still think that that change in complexion that I just mentioned is not something that's just going to last a few weeks. I think it's going to last through the rest of the year.

Speaker 1:

Yeah, it is interesting. It seems like the last four or five trading days we're back to what has worked right, even though the fundamentals and the questioning of the AI trade are there, meaning go large cap, go tech, small caps lag. It's the same playbook that everyone, seemingly, is going right back to. What are some of the identifiers, from your vantage point, of what a dead cat bounce looks like? I mean, are there certain things that make you think quantitatively, that this is more of just likely going to be a failed rally?

Speaker 2:

Well, it's looking at just the generic moving averages, whether it's the 50-day, the 100-day, the 150-day, so sort of defining. That is a lower high. I guess you can say I'll argue that the highs that we saw in early July probably will be the highest for the year in the S&P. Now I do I hope because I'm talking my book being long some small mid-cap stocks that we do have the market sort of find other things to buy, that we'll have to see about that, and that a lot of small, medium-sized companies are going to benefit from a lower cost of capital, since a lot of them have borrowed floating rate and, as I mentioned, maybe people are questioning all this AI spend for the bigger names. But on the other hand, we have growth challenges that are going to negatively affect small, medium-sized businesses. But specifically to your question, it's more of a technical sort of definition and looking for lower highs in the S&P. If that's the case and we're basically seeing the right hand of a head and shoulders formation, then it'll be proven as such.

Speaker 2:

Now we get CPI, of course tomorrow.

Speaker 2:

But the thing about CPI is for this particular print we priced in so many rate cuts already.

Speaker 2:

In fact we're pricing in basically a 3.5% Fed funds rate by next June, july, that even if it was a benign number tomorrow, which it very well could be, I'm not sure how much more the markets are going to then price it in again more the markets are going to then price it in again Now maybe we raised the odds of a 50 basis point cut in September. The last time I checked this morning after the PPI, the odds of that second cut were about 56%, when we had the Monday sort of crash in markets around the world. It was more of a crash in Japan and Taiwan and some Asian markets rather than here, but those odds had gotten up to 100%. So we'll see what CPI brings. But markets already anticipate a lot of rate cuts, whether it's 50 or 25 in terms of cadence in September, it doesn't really matter. It's really how far they're going to be able to push this. But I think the days of zero rates and massive QE are over, hopefully forever, but at least in this cycle for a while.

Speaker 1:

A question off of YouTube, which I think is nuanced to get into, asking about this carrier trade, saying if the yen unwind is done, would that mean that the carrier trade is also done, because it's related, obviously, to the currency movement? My argument would be probably not, because if the carrier trade is done, you still have this huge interest rate differential regardless and you kind of go back to the same playbook of just short the yen and borrow from Japan. Then Right.

Speaker 2:

And what have we seen the last couple weeks? We had the deputy governor of the BOJ saying okay, I got scared, look what happened. Uh, I got scared, look what happened. My measly 25 basis point rate hike to 0.25 caused all these earthquakes around the world. And now I'm gonna go back to my, into my cave and and not touch rates again.

Speaker 2:

Well, commentary like that just gets the carriage rate back on. Uh, if the Fed starts cutting interest rates, well then that's a potential offset where well, not necessarily the commentary from the deputy governor can regenerate the carry trade. But on the other hand, if the Fed starts cutting interest rates, the yen strengthens, the dollar weakens. That can then offset any sort of regeneration. But to your point, yes, there's still a very wide spread between borrowing rates there, here and the rest of the world. But it was that yen move that really triggered that unwind. I think the yen is one of the cheapest currencies in the world, even with this rally. So if someone asked me if I would want to put it on here, I'd be highly reluctant of it believing that there's going to be now an underlying bid to the yen relative to the dollar.

Speaker 1:

Right, unless it's like a short covering squeeze mechanic dynamic, which was always the risk. In my view, it's that if you have an uncontrollable squeeze because there was so much short speculative behavior, you put a post out on X showing that a lot of that got cut. But that can come back as quickly as it went.

Speaker 2:

Yeah Well, watch that weekly. I mean, that's just one specific area of where people can put on shorts, that being the CME and the futures market. But you can call on any Japanese bank and borrow money and implement that yen carry trade even without using a futures contract. But it at least will be one measure of the extent at which shorts are being put on or put off or taken off in the end.

Speaker 1:

I like that point you mentioned, which is well, how many times can the market price in disinflation? Right, it's like at some point it's kind of a fait accompli? Right, it's, it's like at some point it's, it's it's kind of a fait accompli? Um, I didn't look too deeply at the ppi report today, but was it uh surprising on the downside, given that it wasn't as as high as expected? I mean, the market likes it obviously. Um, is there a chance that we get to more of a disinflation or even outright deflation scare, given the way things are trending?

Speaker 2:

Well, I'm never in the camp that deflation is a scare. It depends on what's deflating. If a technology product is deflating, well, that's not a scare. If a value of an asset that you own is deflating, that could be a scare. With respect to the PPI, headline PPI, core PPI were lighter than expected, but it ended up being all related to the trade component, which measures the wholesale margins on the retail side, and it was the wholesale retail margin within machinery and vehicles that fell more than 1%. That really was the main culprit for the miss in terms of headline PPI.

Speaker 2:

You know, the question is, we've already had a lot of disinflation with goods and, just for perspective, in the 20 years leading into COVID, core goods prices averaged zero. You know there was never, you know, any sustainable level of inflation on the good side because of technology and production efficiencies and cheap labor and so on and so on. Then we obviously got the spike and now we've come back and are falling below zero. The question is is where does that eventually shake out at? Do we just go back to the pre-COVID trend magically, or are we going to more sustainably have a 1%, 2% or 3% price level on the good side? Now on the services side services inflation was never transitory the 20 years leading into COVID. It averaged 2.8% a year over that timeframe, so that accelerated further, obviously post-COVID. The question is is, how much is it going to decelerate as rental growth slowdown works its way into the calculations and now it's running north of five and I do expect further deceleration as the year progresses. But just as inflation sows the seeds for disinflation, disinflation sows the seeds for future inflation and we know one of the main components of CPI is the rental component. So now we're seeing deceleration in rents because of all the supply of multifamily units coming online this year, particularly in the Sunbelt states. But we're sowing the seeds for reacceleration in rent prices in the latter part of 2025 into 2026 because very little new projects are getting started.

Speaker 2:

So I was very much the believer of inflation being a problem in mid 2020 when I started to see or even the spring of 2021, covid had all those shutdowns because I was seeing empty shelves in the supermarket and I felt that supply chains were all getting all screwed up. And then, of course, the government dumping $5 trillion onto the economy. You didn't need a PhD to understand that that was probably going to lead to some inflation and then obviously we're in this disinflationary phase. But I'm expecting for the next call of three years more inflation volatility. I don't believe in in in the fantasy that we're just going to come back down to 2% in the aggregate and just flatline there. So we go up like this, we come down like this and we just stay at 2%. I just don't think that's realistic. Um, like I said, expect more volatility, but I'm acknowledging the disinflationary trend that we're currently seeing. But we have to watch out for things that could flip that.

Speaker 2:

On the good side. We saw a big spike over the past couple of months in shipping rates because of the Red Sea diversions and the Houthi attacks. How that works its way through the supply chain will have to see, but someone's going to have to eat that sort of the supply chain will have to see, but someone's going to have to eat that. And the sharp rise in container price increases have fluid into big increases in air cargo transportation costs. So we'll have to keep an eye on that.

Speaker 2:

Commodity prices have pulled back a lot, but I think commodity prices are in a bull market so I expect a re-acceleration at some point. We'll see how that flows through If the Fed gets aggressive with cutting interest rates because of the word about the economy, well, what happens? Maybe that means we're going to lead to a weaker dollar, which then could start importing inflation for us and watch oil go to $100. So a lot of moving parts that we have to consider here. But to bottom line, my point on inflation is to repeat I do not think we're just magically going back to 2% and staying there.

Speaker 1:

Related to that is a comment from YouTube by S Bain. I think inflation will return soon, driving the US dollar lower. Let's talk about the currency side for a bit, because currency movement is also based on relative inflation levels, not just interest rate. Differentials tend to be correlated, but you know there's there can be distinctions there. If you're bullish on commodities, does that inherently mean you're bearish on the dollar?

Speaker 2:

I like to talk about the dollar in terms of direct crosses, because we can talk, generally speaking, about the dollar, but the dollar right now has its own dynamic against the yen. The dollar has its own dynamic against European currencies the Swiss, the euro and the pound. Pound actually is actually, you know, is really traded pretty well against the dollar, even with the Bank of England rate cut. Trading this 128 level. I find it pretty attractive. Then, on the other hand, you've seen some weakness and the and in worse, I should say, some strength in the dollar versus the Mexican peso. Ever since dollar versus the Mexican peso, ever since Sean Bowne was elected to succeed AMLO, the dollar versus the Canadian dollar, one of our largest trading partners, has pretty much been in a trading range for years now. But I do think, generally speaking, that rising debts and deficits that market participants are finally now paying attention to in terms of its impact and to the possibility of inflation remaining more persistent, notwithstanding this deceleration that we're currently in the midst of that, the dollar, to me, is still going to be under pressure and take a step back.

Speaker 2:

The dollar has really only traded the last couple of years off interest rate differentials only. The dollar bottomed in June 2021, the day of the Fed meeting, when Jay Powell at his press conference said we're finally now talking about tapering QE the dollar took off. The dollar topped in October November 2022, just as the Fed ended its last 75 basis point rate increase and the market started to sniff out a deceleration in the rate of further increases, an eventual stop and then an eventual cut. That's when the dollar topped. Dollar hasn't come close to that October November 2022 peak. So I think the dollar has its own challenges.

Speaker 2:

I guess maybe now, generally speaking against a broad trade weighted basket, we can say that it's going to be in a range. But I think, when you look at the possibility of these rate cuts a further deceleration in the US economy, which I clearly think we're in the midst of, and what I think at the earlier point higher inflation, particularly oil prices that are going to stay higher for a while and just look at the price of gold at $2,500. I mean, what does that say about fiat currencies generally? And $2,500 priced in dollars? What does that say about the US dollar? It's not a vote of confidence, for sure.

Speaker 1:

It goes back to that dramatic line. I keep saying gold is sending a warning. I mean, it's clear that that's the case. All right, let's go back to this point about this being maybe being a dead cat bounce, aside from the fact that seasonality favors more volatility and lower prices here. Anyway, you mentioned you've got a couple of strategies that you run. What do you do when you're in a bounce like this? Are you actually lightening up? Are you going to lower beta? Are you raising cash? What are the action steps? You're doing yourself.

Speaker 2:

So I think for me and I talk only my particular style of investing is trying to be as long-term as possible in nature and that the themes and the ideas that I invest in I try to have a multi-year picture. So when I look at dislocations like we've seen, I'm more inclined to be adding to things that I like that get beaten up, rather than saying, okay, the next couple of months is going to be bumpy and let me trim here and there. I don't necessarily work that way. Now I may get caught up on a downdraft.

Speaker 2:

I mean, I'm long Japanese stocks and that was a rough couple of days but I think there's a secular bull case for Japan that was not going to get disrupted by a yen bounce, even though of course, the level of the yen flows through corporate Japan for sure. But corporate Japan was never planning for a sustainable 160 level in the end. Their sort of budgeting was more like 140, 145. So when the yen rallied and the Nikkei puked, we took advantage. So my ideas are, like I said, longer term in nature. So I try to avoid as best I can a lot of the noise and also because I invest just again talking the way I do it through a value lens. So the things that we own already have low expectations embedded in them, already have cheap valuations that I'm willing to stick with even in volatile, bumpy, downdraft-type markets.

Speaker 1:

All right, that's actually a good topic. The return of the value trade. I mean, I've noted that entering July, it looks like the value-to-growth ratio bottoms and you're actually seeing, for the most part, value holding relative to growth and any discussion around value is inherently a discussion around tech as the leader, because that's the quintessential growth sector and you can argue, maybe overvalued sector overall, certainly most crowded. What sectors broadly seem to have the most long-term value creation potential that are undervalued now? But maybe the market's going to start paying attention to them.

Speaker 2:

So I'll swing back to the commodity space. We are particularly long and bullish energy stocks, particularly the European and Canadian ones. When you look at the European ones, like Shell and BP, you're talking about obviously a volatile sector and very cyclical, but half the multiples on a cash flow basis, a P-based basis, than their US peers. And even within other areas of commodities we've been bullish in long uranium. That has pulled back here precious metals. We've been bullish in long uranium. That has pulled back here precious metals. One area that I find very cheap, that is very disliked, and that is because of big declines in crop prices, like corn and soybeans, are the fertilizer stocks which we were long going into the Russian invasion not having, of course, any idea that would actually do that, notwithstanding the massive troops that they had wasn't on my checkoff list. We had owned them going in, we had sold them then and since then they've gotten cut in half and that is sort of correlated highly with the prices of corn, soybean and wheat, even though those fertilizers go into other things as well, so like mosaic and nutrient, which have gotten cut in half or more. So I find them dirt, dirt cheap and that corn and soybean prices are probably bottoming out here, even though it doesn't seem that way and they can't get out of their own way. That's another cheap area of the market. And then I find other areas. Like you know, I'm very bullish and anybody that's heard me on other interviews I'm very bullish on on Asia over the next 10 years. I'm very bullish on the growing middle class there and we've been along some of the Macau casino stocks, which has been total pigs over the last three months, mostly as people are down and out on the Chinese consumer. I'm not down and out on the Chinese consumer. I acknowledge the challenges that they currently face, particularly with the downdraft in the Chinese real estate market, in the fall in apartment prices, which is the biggest asset for a lot of people in China, but that decline will end at some point. They have very high savings rates. They love to travel, they love to gamble, so we are very bullish on the Cal Casino stocks and also there are plenty of cheap stocks within the US as well that we're finding and also in Europe.

Speaker 2:

So if you look at things outside of the big AI-related influence stocks, there's cheap stuff out there and this whole value growth thing also. To pin it down now, it's really just an analysis of those big names and the AI thing. Ai gave the big cap tech stocks and the S&P a second wind. That second wind, we bottomed in October 2022 in the S&P and call it maybe February, march. Those stocks started to take off. That was that second wind. If we're now beginning to question sort of the follow through of that hype, well then you have the real potential scenario of that growth value tree converging. Now I'm obviously hoping that the value side catches up to the big names as opposed to the big names catching down to value. But I do think you can make a very good case for convergence here because of the now fundamental sort of cynical take people are now taking to the revenue generating possibilities of all that AI spent.

Speaker 1:

Another question from S Spain. On YouTube I'll show If slash. When we go into recession. Does Peter expect a significant sell-off of gold, even though so little of it's held in investment funds? Now I will say, at least on my end, I've made this point before. It's very well known from a behavioral finance perspective the disposition effect. People tend to sell their winners before they sell their losers when faced with uncertainty and volatility. To the extent that gold is one of the few winners, you'd think it actually becomes a source of liquidity. So there might be some selling pressure there.

Speaker 2:

But what are your thoughts on gold if you're going to have this kind of broader slowdown? Okay, let's look at it in two ways. When you have the leveraged margin call unwind, like we saw over the last couple of weeks, all correlations go to one and pretty much everything goes down. Once you sort of cycle through that and the market starts to more focus on okay, where the pluses, where the minuses within the market, well, a recession is going to be good for gold because that means that the Fed is going to be very easy, easier than they have been. The dollar is likely to weaken in that scenario if the weakness is more pronounced in the US and if you get a decline in the stock market as a result of that.

Speaker 2:

I mean, what was the best performing asset in the 1930s? It was gold, and it was gold mining stocks. What was the best performing asset class in the 70s? It was commodity stocks. So you do have the possibility where the stock market may be more challenged and commodities, particularly precious metals, may do better. But, like I said, if everything is going to go down because there are margin calls, then nothing is safe. But once you digest that, the markets can pick and choose here, more so amongst different asset classes, when not everyone is selling all at once. So I do expect much further upside. In gold and silver In particular, the miners, which I still think are still very cheap relative to the price of their underlying products they're selling.

Speaker 1:

Another comment off of YouTube which we can expand on, as opposed to the direct answer here when do you think AI will move the market the most? We know that if AI is going to go sour for a moment in time, it's probably going to hit the NVIDIA Microsoft play. But are there other things which are tied to AI which are not as direct as the semi-play that could maybe get really hurt you?

Speaker 2:

Hurt? I don't know about hurt, I mean, I think, for the users of AI. Just as Now, let's keep in mind, with AI, the first papers on AI were written in the early 1950s, so in one form or another, ai has been around for 75 years. So we're really talking about this new iteration of AI. But the beauty about technology, the beauty about software in particular, which even the CEO of Microsoft in their last conference call said, at the end of the day, ai is just software, which is what it is. We've seen every year improvements in software around the world every year for decades. So this is now another improvement in software that makes the users of that software more productive. There are more features, there are more things that you can do that can make your day more efficient, and that's just going to continue with software progression anyway. Those are the beneficiaries. Now, how to quantify that? Well, companies, every single day, are trying to find ways of being more productive and that's just one of the ways that can help them in that.

Speaker 2:

So I think this whole AI discussion, right now at least, is really on the spenders on it and all that capital and the beneficiaries of that spend, like NVIDIA and other infrastructure names, but you know we're going to wake up one day and some of these big companies are going to say, okay, you know we've built it out, we can slow down our CapEx spend.

Speaker 2:

I don't know when that'll be. It may be next quarter, maybe it'll be two years from now. But those are the things that we have to watch out for, because the market cap increases in these big names have been so extraordinary. You just have to wonder how much pull forward of returns that they've experienced. When you're looking at trillions of dollars in market cap relative to the size of not just the US economy but the global economy, it's rather astonishing how big these companies have gotten in terms of market cap Does whoever we own I don't want to trash talk them for clients and for clients that obviously want to keep pace with the S&P we have to own them to an extent. I try to balance it off with a lot of other things, but you know, I think we're in a gut check time, I believe, right now for these big names in terms of their outperformance. Not questioning how great they are as companies, but we need to start questioning their ability to continue to carry the markets with them.

Speaker 1:

Very well said. Ability to continue to carry the markets with them. Very well said. Does whoever win the presidency matter at all to any of your thinking in terms of sector allocation value what the market favors, or is that all just rhetoric that has nothing to do with the reality?

Speaker 2:

Well, I will talk about this very analytically and not politically in terms of driving an investment change or a decision on who is going to win Trump. One of the things where markets benefited when he won was he had the ability to cut the corporate income tax rate from 35 to 21. If he wins again, I find it highly unlikely. While he has said it, he'd like to cut it further. I find it highly unlikely he's going to be able to cut it again. I think at best it stays at 21%. He also in 2016, through the rest of his term. As part of that corporate income tax cut, we obviously got a big personal income tax cut in late 2017, early 2018. They expire next year. If he wins, at best we'll just see an extension of that. So, in terms of tax rates, if he wins, you're not going to see any change Now. So I don't expect any sort of impetus in terms of the benefits, like we did in 2016. It's more, at best, status quo on the tax side.

Speaker 2:

On the regulatory side, obviously, the Republicans are going to be less intrusive on the regulatory side, as opposed to the egregious overreach on the other side. That said, with the Supreme Court's overruling of Chevron, we have to start asking is the executive branch going to be as influential in enlarging the regulatory state as they were prior to that decision? Is the regulatory state going to be more in the hands of Congress in terms of producing more specific laws that need to be carried through and in the hands of judges who are going to then deal with existing regulations, rather than the executive branch hiring whoever they want to run their agencies, and the agencies are basically making law with the vague ones that Congress originally produces. So I'm wondering whether that decision, like I said, can take away that executive branch influence on the regulatory state. If that's the case, then who is president is less influential. Now, if Harris wins and the Republicans keep at least one side of Congress, she's not going to be able to change the corporate income tax rate because that does not expire. I think there'll obviously be a big negotiation on the extension of the personal side, but if the economy is going to be weak, she may do what Obama did and extend, like Obama extended, the Bush tax cuts. She may just extend the Trump tax cuts because she doesn't want to tank the economy. So and then, like I said on the reverse, on the regulatory state her ability to sort of make whatever rule she wants through via her agencies. Those agencies may be a bit more limited in light of that agency. I'm sorry of that Supreme Court decision.

Speaker 2:

So I hope I tried to stay as apolitical as possible and look at it very analytically. And the bottom line is I am not changing my investment strategy depending on who wins. And let's just take oil I just mentioned I'm bullish on oil. People say, well, if Trump wins, I probably want to be bearish on oil because he'll allow more drilling and there'll be more supply and whatever. I think company executives are much more disciplined than that and the executive branch will only have an influence on several lands. Oil is at $80 and the rate count has done nothing but go down over the past year, irrespective of the price of oil. So I don't even think that that is necessarily going to really impact the global commodity that is energy. So I am not changing my portfolios or my investment strategy, regardless of who wins.

Speaker 1:

It would seem to me that the asset class that would be most impacted would actually be treasuries. It'd be duration. I mean I put out that post or that, that poll on x get to that. Yeah, no, really, because the um, the, the post I put out or the poll I put out on x was you know who is more uh, who will add on more debt? Harris or trump? And actually, to my surprise, most people said harris. I was like I think it'll be pretty close. It'll be close.

Speaker 2:

I agree, they're gonna be the same roughly non-discretionary piece of spend that neither is going to be able to influence.

Speaker 1:

Right, so exactly right, and it's just a function of where they kind of funnel the actual side of things. But you keep hearing this narrative that treasuries will continue to be struggling from a duration perspective because the debt load keeps on rising. Is there a chance at all that there's a long-term bullish case for holding duration as opposed to a trade sequence?

Speaker 2:

So when I was in grade school and I started reading books on Wall Street in the mid 80s, I heard people whining about the growing budget deficit and the exploding debts and that would be a crowding out of the private sector and that would lead to higher interest rates. And here we are 40 years later and we're wondering if this is ever going to matter. And I do believe now it does begin to matter because I think over the last 10 years we're losing in terms of the percentage ownership of treasuries. We're losing that foreign bid. Ten years ago foreigners made up about they owned half the US treasury market. Now they own about 30 percent of the US treasury market. Now the Fed, of course, has filled that gap to a large extent. Banks have added more, notwithstanding the trouble they got into with SBB and so on, but there has been others that have sort of filled in that gap to Foreigners are less of a bid and just the level of debts and deficits I mean you're talking about. Here we are with about a 6% budget deficit relative to GDP. In an economic expansion that will be a 10% plus budget deficit relative to GDP. In the next recession that $2 trillion deficit will be $3 trillion, and I do think it's a fair question to ask that, if the laws of supply and demand still hold, will this mean an underlying bid to longer end yields and that maybe it's still not time to reach for that duration?

Speaker 2:

I'm not in that camp. To me. I'm perfectly happy still owning short duration bonds for clients, and we've purposely been tilted that way for a while now. I don't think duration is really attractive at all. Now can you get rallies like we've seen For sure. I think, specifically speaking, the 10-year, this 375, 385 is really a very key level because it was the launching point in July 2023 for the move to 5%, which I believe was triggered by the Bank of Japan essentially getting rid of yield curve control when they widened it to 1% and said they would maybe defend it if it got there, but unlikely. So now we're sort of backing to that level and I do think that yield holds here.

Speaker 2:

Now I get the trade. I understand yes, you want to buy duration. If the economy goes into recession inflation's rolling over you want to buy duration. But I think we're in a bond bear market and this bond bear market is not just going to end in a couple of years and, yes, we're going to have bull markets within that, like we've definitely seen here. But I think this is a bear market in credit where, I should say, in treasury yields that's going to last a while and if you look at the history and history I'll define as going back to even the 1800s bull markets, bear markets in treasuries last multiple decades and we know we just came off a 40-year bull market and I wouldn't be surprised if we're in the midst of a 10 to 20-year bear market Now.

Speaker 2:

Where rates go, I have no idea. On the upside, I just think that there's going to be an underlying bid to yield. We're going to get rallies, like I said, but I don't think that it's worth holding too much duration here because I still think that their rate scares potentially to the upside. On long-run paper. I mean when we had $17 trillion of negative yielding bonds, one can argue that that was the greatest, biggest financial bubble in the history of bubbles in terms of dollar size and that just doesn't unwind in a couple of years. Like I said, granted TLT looking at that as the 20-year plus maturity of treasuries that fell by 50%, imagine owning US treasuries and watching your capital get cut in half.

Speaker 1:

Oh, I get it, my friend. I mean in my case by mandate. I get the pain, believe me. I mean just from that perspective. But I'm glad you mentioned the point about the negative yields, because that's also underappreciated.

Speaker 2:

We Believe me. I mean just from that perspective. But I'm glad you mentioned the point about the negative yields, because that's also underappreciated. We've actually had argued been in a bear market for bonds for a long time because if you have negative real yields you're losing money. Yes, on an inflation adjusted basis, for sure. Yes, but on a nominal basis. I think that this bear market still has more time to go and people just think that, you know, inflation is going to go back to 2%. As I said, that's going to cut rates, everything's going to be fine. You buy the long end. It's the playbook that worked for a couple of decades. I'm just questioning whether that same playbook is going to work this time. I'm not so sure. Maybe it does, and I'll acknowledge that, and it'll be fine with me if it does. But I'm also trying to be honest with myself that maybe it doesn't this time.

Speaker 1:

Let's go back to the value side of things. Is it fair to say that there's probably many more undervalued names in the small cap space than large cap space? I mean, what area do you tend to play with?

Speaker 2:

I just look for an attractive, cheap stock and I don't care what market cap it's in. I want to make sure that I'm not in a value trap. I want to make sure that the fundamental outlook for this business is only temporarily impacted by whatever external or internal thing is going on. I don't want to be stuck in a department store stock because every day somebody tells me how cheap Macy's is, but I know the secular headwinds for that. Here's an example. We owned I should say we owned and we bought it pretty much soon after it went public Kenview, to use that as an example.

Speaker 2:

This was the consumer healthcare business that Johnson Johnson spun out and when it spun out it was sort of left for dead. It was spun out like maybe 2022, traded down to like $17, $18 and just more apathy, very little growth. Bernstein initiated coverage with an underperform trading at 16 tons earnings for a company that owns these phenomenal brands like Band-Aid and Listerine and Tylenol and Neutrogena, and I just felt like, wow, this is one of those spinoffs that no one cares about. Everyone thinks that there's no growth here. But I thought that, okay, this is cheap, they're out from the wings of the parent company. Now they may actually focus more on these brands and developing them through marketing and spend and so on, and they re-rated higher just a few weeks ago after they reported earnings that were pretty good.

Speaker 2:

So that's a big cap name that I happen to find value. Then, on the other hand, I may find value in a company that has a billion dollar market cap. I am market cap agnostic. Show me company with what I think is over the next five years. That has a still growing business that's only temporarily hurt with a cheap valuation and I get attracted to it. I'd rather I wake up every day looking at the 52 week low list rather than saying, OK, what stocks the 52-week high list am I going to buy in hopes I can sell it even higher.

Speaker 1:

You definitely have some fans, peter. I'll just show one from X saying I love Peter's take. As we say, it's all patterns and cycles, peter. For those who want to track more of your thoughts, more of your work, talk about the sub stack. How often you write, what do people find there? And then, if they're interested in some of the strategies that you offer, where would you point them to?

Speaker 2:

So on the writing side, I write every day and I really try to limit each one of my pieces to like one to two minutes. I am not a long form writer. I don't want to waste people's time. I want you to know that if one of my notes comes into your inbox tops two minutes. You can be done reading it and you can have a good understanding of what's important going on out there, whether it's something macro or it's something micro, where I'm going through a lot of the earnings calls in the comments that I find noteworthy On the money management side, the wealth management side, Bleakly Financial Group, our website's bleaklycom, and you can learn more about us and reach out if you're interested in hearing more about our services.

Speaker 1:

Everybody. Please make sure you check out Peter Book for our sub stack. Also follow him on X. I'm going to take a break, since this is my fourth live stream of the day, peter. I will see you shortly in a couple of days for Camp Kotak. I'm hopefully going to be doing some of these spaces live, so stay tuned for that folks and appreciate those who continue to engage positively. Thank you for watching and listening to Lead Lag Live. Thank you, peter, appreciate it. Thanks, mike, cheers everybody. Thank you.

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Michael A. Gayed, CFA

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