Peter Boockvar on Global Crosswinds: Japan, Europe, and the US Treasury Market
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Welcome to the Risk Reversal Podcast. I'm very excited. Every time I see Peter Buchvar on the calendar, I get excited and he's with me now. He's the Chief Investment Officer at Bleakley Financial Group. He is a friend of Fast Money. He's a friend of CNBC and he's a friend of ours. Peter, how are you? Hi, Guy. Great to see you. Everything's good, thanks.

Well, as you know, and I think most of our listeners and viewers know that I think the world of you and your work, and I've thought that now for many, many years, and you're one of those voices that you turn the volume up on CNBC. But it's great we have you here today because obviously we got a CPI report earlier today, today being Wednesday, that the market

really seemingly championed and was excited about, at least in the short term. But there are a lot of things that have happened on the back of it. So let's start there with the CPI number and what your thoughts were.

Right. So the number came in for both headline and core of two tenths. The estimate was three tenths. I think these inflation numbers, more so than the jobs numbers, because the jobs numbers get revised so many times, inflation numbers become the number to watch. And Treasury market had an immediate rally on the benign number and got back closer to unchanged. Now it's sort of back to where it was right before the number, because this actually, on the good side of the lease, this is pre-tariffed.

inflation data. But I think overall, we seem to be stuck around this 3% level, which creates an issue for the Fed because the Fed wants it to not three. And while three is closer to two than nine was in the summer of 2022, it's still not there to where the Fed wants to be on a sustainable basis. And I emphasize the word sustainable because just going to two is not enough.

has to stay there well what's interesting about that is you know people think it's a magic number gets it too and then sort of you know all bets are off and they've won but to your point about sustainability that's it because there's been you know there's been more volatility i think in these inflation reports that i think a lot of people have expected a few years ago and i think therein lies i want to say part of the problem and it's a lot stickier than people thought

It's a lot stickier than pundits thought. And quite frankly, it's created a bit of a problem, I think, for this Federal Reserve. By the way, through the lens of the market, I think you would agree as well. I think they've navigated it pretty well. But the question is, have they stuck this landing? A lot of people think they have. I am not one of those people. It very much remains to be seen because when you have 15 years of zero interest rates and then you go vertical,

not everyone is impacted at the same time by those higher interest rates. Now, if you have floating rate debt, yes, you're immediately impacted as your interest expense goes up with every Federal Reserve rate increase. But if in 2020,

2021, where rates were microscopic and you were a large investment grade company who had termed out your debt by, call it, five years. Well, here we are five years later, that loan is coming due. You'll be able to refinance it just fine, but the interest expense may go up 150, 200 basis points, or I should say the interest rate on the loan may go up by that much relative to the loan due in 2020.

And in 2026, there's a trillion dollars of investment grade debt coming due. 27, another trillion dollars. After this year, about a trillion dollars. So I still think that we have years of acclimation to this higher rate environment. So it's still early, I think, and premature to really determine how much the Fed has landed this plane because also,

The economy has been resting on three pillars, excessive government spending, and I say excessive as we can define a 7% budget deficit relative to GDP ratio, upper income spending that we know has been benefiting from the robust stock market and high home prices along with a job. And then the third one was anything related to AI spend.

So, there are now threats to that, irrespective of what the Fed is trying to do here.

And I think that's sort of the challenge that going forward from here, the Fed is now going to face. It's interesting. The last time I think we had you on, I want to say it was February 19th. And I think we titled it is Deep Seek the Canary in the Mag7 Coal Mine. And you talked about that. And I think to a certain extent, that's starting to come to fruition. And I think you have a pretty strong view on this. But I think people underestimate the importance

It's hard to say they underestimate the importance of these names, but in terms of how deeply they're embedded into the investment community and the institutional community, if in fact this unwind is underway, I don't think people fully understand the potential ramifications. So speak to that. I talked then that I felt that the AI trade in terms of its market dominance was over. And you can actually rewind a clock to last year because I think it was

in July, when investors were digesting second quarter earnings, that question started to be raised about, okay, this generative AI could be a great thing, but we need to start to differentiate between all the money that's being spent on developing these models and then the beneficiaries of all that spent.

So that's when questions started to get raised on how do these companies monetize the AI while let's still reward NVIDIA because there's so much money being rewarded to them and being spent on their products. And then fast forward as the year started to progress, I think these conversations started to heat up. And then once DeepSeek hit, and the interesting thing is we've been doing this long enough, Guy, is that the impactful things that last more than just a day are the ones, the events that no one was thinking about.

And that Monday when we came in, no one was thinking about DeepSeq or the impact it would potentially have. And what it told us was all the money that you're spending, you being all these hyperscalers, the hundreds of billions of dollars, well, we just commoditized your product. And you guys aren't the only one that are going to be able to develop this product. So that's when I think the MagSafe trade really started to splinter.

And here we are now. And I think that the years of dominance, the phenomenal stock market performance to the point where these seven stocks became 35% of the S&P, that level of dominance, I keep using that word, I believe is over. Now, that doesn't mean that other things can't work because what we've seen is a lot of that money has rotated into other things. I mean, look at the international markets that had been robust year to date.

I don't want to get too wonky here, but there's some knock-on effects that I think we need to talk about. And one of them is the investment. People think, I shouldn't say that, I think there's a lot of thought that all the investment dollars going into these names are probably just US-centric, but

But actually, nothing could be farther from the truth. The reality is there are a lot of institutions, funds overseas that are investing. And you seem to think, and I think you're correct, the knock-on effect it could potentially have to the US dollar is something that the market's not paying enough attention to. Exactly. The MAG-7 became a reserve asset for foreign investors, including central banks.

Just as they parked U.S. dollars into treasuries, they parked U.S. dollars into stocks, particularly those MAC-7. And just to quantify, the Norges Bank, which is not a commercial bank in Norway, it is the Norwegian central bank. If you look at their Fed filings as of December 31st, they owned

324 million shares of Nvidia. They were the 10th largest shareholder of Nvidia. The Swiss National Bank that has printed money out of thin air to buy US stocks. They owned about 90 million shares of Nvidia. Now that's one stock, but this became a reserve holding. So if you look at over the last year,

you can really see that the fund flows into these stocks, or I should say the stock performance of them, really correlated well with the dollar because the whole world piled into these names, not just

foreigners, but retail, institutional. Everyone had to be in these days because these are the names that worked. And that's the thing with the S&P 500 is that the higher it goes, the bigger the market caps get, the more money goes into them furthering the increase. So now we're beginning to get a taste of what the opposite is like, but also the

questioning the fundamentals and the growth rates from here going forward with deep sea being obviously a main catalyst. And of course, with Tesla, with Musk and all that stuff going on with that as well.

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Let's go from Europe to the other side of the planet and go over to Japan, something that I know you watch. And, you know, just for a little history lesson here, it was obviously July of last year. I think it was July 18th. I might be wrong, so don't at me if I'm off by a couple days. But it was a Thursday, July

CPI came out here in the United States at 8.30 a.m. as it typically does. And dollar yen at the time was 161 and change. Over the next 15 or 20 minutes, it went from 161. I think it traded as low as 156 and a half, which doesn't sound like a big deal. But in terms of developed market currencies, it was a huge deal. And then we subsequently saw the yen strengthen into August 5th.

left and then we obviously had a huge day in the market where the VIX went north of 60 and we obviously had a de-risking in the U.S equity market in a way that we haven't seen in quite some time the yen on the yen carry unwind trade dollar yen by the way continued to weaken the end continued to strengthen I think we traded down below 140 and then obviously dollar got back on its horse

Recently, we've seen weakness in the dollar. As a matter of fact, I think dollar-yen got to about 146.5 earlier this week or late last week. Are people paying too much attention to this like I am or not enough attention to this? I think not enough. We know that BOJ was sort of the last holdout.

in addressing inflation. Well, let me take a step back. And I know this is something you've talked about for a while. For years, central bankers begged for higher inflation, but it was always to be careful of what you wish for. And the BOJ certainly was one of those rooting for higher inflation in nominal terms. And they finally got it. And we've seen an extraordinary rise in GGB yields.

And to the point where the 10-year GGB yield in particular is at the highest level since 2008, along with inflation break-evens that have been rising there as well. And the Bank of Japan finally realizing, yes, we've got inflation, but this has now become a problem because our populace doesn't like a rise in their cost of living and rate growth is lagging that rise in inflation.

So, they're actually worse off today because real wages are now falling again in Japan. So, that's why the Japanese are becoming more tolerant for these rate increases by the BOJ to try to start cooling inflation. But the world is a big place, markets are global, and fund flows that take place in

reverberate in the US. So now all of a sudden, JGB yields are very attractive to that Japanese investor. Meanwhile, the Japanese investor is the largest foreign holder of US Treasuries. So yes, we've gotten a nice rally here in Treasuries. But if we have the largest holder that's going to now bring money home because it's more attractive to invest it there, this long duration bear market that we've been in bonds is not over. Yes, a temporary respite now, but

To me, there's still a lot of risk in duration and we have to watch GGB yields because what happens in GGB yields will flow into European bonds. Now we've seen a big rush to increase dramatically fiscal spending in Europe. We had the worst day in the German bond market the other last week.

since the Berlin Wall fell. So you must pay attention. If you're going to follow the US Treasury market, you must pay attention to what's going on in Japan and what's going on in Europe. Thank you for that, because I obviously think it's vitally important. Not enough people are paying attention to it.

And I think the one-dimensional school of thought is if there's a weakening economy here in the United States, and if you have a Treasury Secretary in the form of Mr. Besson, and obviously now President Trump, both talking about lower yields being at the forefront of what's important, I think people think that's why yields, at least in the short term, have gone from 4.8 in a 10-year. I think we got down to about 4.11 or 4.12.

I think then if you really start to peel back the onion, as you just did, there are reasons and cogent arguments to be made that, wait a second, I get that things are weakening here in the United States, but the overriding condition is the largest owner of Treasuries is probably not going to be a buyer on the margins. As a matter of fact, might actually be an incremental seller. And I don't think you or I are talking about failed auctions necessarily.

but you could have auctions that don't go particularly well. And I think with all the issuance that's coming up, I think it stands to reason that you could see bond yields rise in a way that most people don't think fathomable. So I've been in the camp that yields are going higher. I looked like a genius at some points. I looked like a jerk at other points, which is typically the case. But we're at an inflection point here at 4.3% in the 10-year where it can really go either way. I mean, and I think it's going the way

in terms of higher yields and yields are not going higher because all there's this resurgence of growth here in the United States. So what potentially could that look like if we start to see yields go higher here in the United States with the backdrop of potentially a weakening US dollar? - It's very sort of third world-ish when you have a higher interest rates in your country and a weaker currency. We've seen that in the emerging world.

going back through history. So that's something that it's very important to pay attention to. So to your question of what would be a catalyst to sort of re-move the 10-year yield back up again to 4.5 plus. And it could be further rise in rates in Japan that spills over. It could be further weakness in the European bond market. And it could be tariffs. Tariffs are an interesting debate.

both from an economic standpoint in terms of its impact, but also there's obviously a big debate on the pricing side. Is it inflationary? Is it not? Is it a one-time step up in price and nothing more? Or is there something that flows through over multiple years? Is it potentially deflationary because it kills demand? So it's all this stuff.

Luckily, we can use 2018 as an example because we had tariffs. We had steel and aluminum tariffs. It seemed like every day there was another tariff being thrown out. So there is some recent experience. Back then, it was sort of the pre-inflationary world. That was when we were in this 1% to 2% easy-peasy inflation environment where...

If you had plus pressures, it was more eaten by the producer rather than being passed on to the consumer. So the question now is, in this post-inflationary world, where pricing pressures are still evident in a lot of different places, are companies going to have an easier time passing off their higher cost to the rest of us? While the rest of us are still dealing with PTSD from the sharp rise in inflation, do we want that in terms of will we accept them?

So if that is accepted, if those prices are passed through, there are many instances where tariffs are not going to be a one-time step up. If I'm a multifamily landlord and I am planning on building a new building, but the cost of my lumber, the cost of my steel, the cost of my copper wiring, the cost of my aluminum just went up 20% or whatever the price increases, I'm not going to build that building. Therefore, over the next couple of years, you're going to see

in addition to what's already occurring, a sharp decline in the pace of multifamily building. And therefore, rents are going to reaccelerate, which is going to be more than just a one-time price adjustment. So these are some of the factors that could see, with tariffs, a rise in inflation in

particularly on the good side and in rents, as I mentioned, that can lead to a higher rise, you know, another rise in long-term interest rates. The experimentation here, I don't necessarily know if there's a corollary historically to go back and look. You know, people will say this is eerily reminiscent of what we saw, I guess, I don't know, late 1920s or so in terms of tariffs and what have you. Other people say, you know, we haven't seen anything like this.

I'm not smart enough to figure it out, but what I will tell you is the people that speak about the certainty of what tariffs can and can't do, I don't think there is any certainty right here. And I think you're suggesting exactly that. I mean, they're experimenting with things that I don't think they necessarily know the outcome of. And the other thing that I think this all plays into is the job market. And again, I want to be clear, I'm surprised we haven't seen a significant uptick in the unemployment rate.

I would have thought by this time we would see an unemployment rate north of 4.6%. That's obviously not what's taking place, but it doesn't mean it's not inevitable. And I do think you're going to start to see an acceleration in the unemployment rate and you start to hit escape velocity. And I don't know necessarily if the market is prepared for that. So speak to what you're looking at in the job market and the importance of it.

If we go back, call it six months or even nine months or three quarters, one of the dynamics that was occurring in the labor market was the pace of firings remained very low. A lot of companies had the experience of COVID and coming out of it, of having difficulty getting back their people. And once they got back their people, they said, "We're not losing our people." So there's been a reluctance to lay off people.

But at the same time, there's been a slowing in the pace of hiring. And you can see that in the continuing claims data, which has been hovering around the highest level since November 2021.

So what was most noteworthy about this last payroll report that we saw a couple of weeks ago was the U6 number. Now, the standard unemployment rate that we see in the paper is the U3. That came in at 4%, which is pretty benign. Very nice. The U6 includes those that are working part-time that want a full-time job. It also includes people that have stopped looking for work but would take a job if offered.

That jumped from 7.5% to 8%. That 8% figure is a multi-year high. So the labor market is showing some signs of shaky legs. And you throw the lack of business clarity and visibility with what's going on in tariffs. You can be sure that a lot of executives are saying, you know what? We were thinking about hiring that person, but

Let's just wait. Let's just see how things play out. So I'm expecting over the next couple of months, potentially a more notable slowdown in the pace of hirings. But that 8% U6 number definitely concerned me. By the way, the implementation of AI as well, I think is probably a job killer in the short term. Now people will say in the long term, it's going to create jobs. That may be true. But in the short term, I think it obviously is going to have an impact

on hiring and I think to a certain extent, the numbers in the actual workforce because I think companies have learned they can probably do more with less. And I don't necessarily know that the market's paying enough attention to that as well. So here's sort of a loaded question for you and I know you're capable of answering it. We talk about a lot of things and if you watch the network every day, it's seemingly talking about the same things over and over again and people have different answers or takes on things.

What's the one thing that you've been watching and noticing that is not getting enough airtime, in your opinion? Getting back to that Mag7 discussion, this sell-off in the markets, it's very easy for people to say, okay, markets don't like tariffs. That's why we're down. And I would argue that

you have to appreciate that if you lose the leadership of the market that has been so extraordinary to the point where it even exceeded the top stocks in 2000, you need to pass that baton on to something else.

to maintain a certain level of these markets. So I think people don't appreciate that that trade may not come back and that, yes, we're going to have nice rallies, rip-roaring rallies, but they may not be as a group

the leader that over the next 10 years. And we've seen this in the history of time. A group of stocks that dominate for 10 plus years don't tend to dominate for the next 10 years. And we may be moving into that sort of transition. And I think that that's something that we should be paying attention to. And one other thing to add to that, U.S. stocks have so dominated

the international markets, that this shift to international markets, that pendulum possibly swinging in the other direction, may not just be a few-month thing. This can be a multi-year thing. And that people see, OK, the DAX is up and Hang Seng has rallied. But that can be just a temporary thing. It may not be temporary. It may be longer lasting. And one thing, one more thing.

onto the inflation discussion, don't stop looking at commodity prices. Tariffs will lead to higher commodity prices, particularly on the raw industrial side. And the CRB Raw Industrials Index that I like to look at

Yesterday closed just shy of a multi-year high. And if you look at the longer term chart, it is crafting out a classic bottoming. So all of a sudden, you get a reacceleration of commodity prices. It's going to really complicate the inflation discussion and the job of the Fed.

I'm glad you brought that up because too many people, I think, are focused on one commodity, and that's crude oil. And they see crude oil trading at multi-year lows and say, well, I mean, inflation must be under control. And they're not paying attention to these soft commodities or these industrial metals that have seemingly had a bit of a turn and will continue to do so in this paradigm shift. And the other thing that you mentioned that's fascinating, in becoming US-first,

we might have just unleashed europe in a way we haven't seen in decades and you just spoke to that and you know it's sort of that be careful what you wish for thing because it's happening right before our very eyes and the amount of investment dollars i mean just think about what germany just announced in terms of the spend that they're going to do and you see some of these european defense stocks and what have you i mean we're seeing moves that we haven't seen

in decades. And it's happening right before our eyes. Before we get out of here, I just want to sort of go down this road a little bit because we have to talk about it. The gold market is resilient as hell. And despite the fact that rates go up, rates go down, dollar higher, lower, whatever you want to say about Bitcoin, gold is hanging in there like a champ. And I know you've been a gold bull. What are your thoughts here? Okay, so I'm going to break this down into two parts. The first part being from

2022, when Russia invaded Ukraine and half their central bank reserves were frozen, and the world started to realize, you know what? We need to rely less on the US. We need to own some assets that we can park on our own soil, and that's going to be gold. So we've had this...

ferocious buying of gold over the last bunch of years, as we know, from foreign central banks. Now we have the new president who is sort of splintering the world into something that's more multipolar. That's giving even more incentive for foreign central banks and other foreigners to own more gold and to potentially own less dollars. Hence the dollar weakness that we've seen. Let me own less U.S. tech stocks. Let me potentially own less U.S. assets that I was investing in.

If you're Europe, let me buy my defense stuff from European companies and less so from Raytheon and Lockheed. If you are China, you're realizing you cannot rely on the U.S. as a trading partner. You cannot rely on U.S. technology. You need to develop it yourself. If you're developing yourself, you're taking your dollars back to China.

And gold is sort of this beneficiary of any sort of surpluses or excesses that are taking place when that money is getting repatriated outside the US. At some point, and we're beginning to see the emperors of it,

The Western investor, which has ignored gold since 2022 because they've been buying US treasuries because of the yield, they are now waking up to the importance of owning some gold in this very chaotic world. So the Western investor is now catching up to the rest of the world and starting to add again to their gold holdings. And we're seeing that in the ETF holdings in the aggregate. Pay attention, people, because I think it continues to be a story. And

And everything that we just spoke about for the last half hour, those seemingly independent stories and very siloed, I think, Peter, you would agree are extraordinarily interconnected. And I think, you know, market participants are starting to come to the realization that when one domino falls, it has a huge impact on some of these other dominoes. And you sort of laid it out for us in an extraordinarily elegant way. So thanks so much for joining us, Peter. Thanks, Guy. Always great to chat with you.