Ask The Expert - Peter Boockvar - February 2022

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Craig: Welcome back to Sprott Money News, sprottmoney.com. It is February 2022, and it is time for your monthly "Ask The Expert" segment. I'm your host, Craig Hemke, and joining us this month is a new guest, Peter Boockvar. Peter is the chief investment officer of Bleakley Advisory Group. He's also the editor of "The Boock Report," which you can find and sign up for at boockreport.com, but there's a C in there, boockreport.com. Peter, a frequent contributor in financial media, financial television, and really a treat to get a chance to visit with him and have him answer a few of your questions. So, Peter, thank you so much for joining me this month.

Peter: Thanks, Craig. Appreciate having me.

Craig: It's great to make your acquaintance and great to visit with you. And before we get started, that usual reminder, it is Sprott Money that puts out this content. And if you wanna thank Sprott Money for this content, the easiest thing you can do is give them a subscribe or a like on whichever channel you enjoy this, whether it's YouTube or Spotify or whatever. Give us a like or a subscribe, that'll help us cast a wider net. And also anytime you wanna be notified of new content that Sprott Money puts out, you can go to sprottmoney.com and register for the free email newsletter. Just add your email address and you'll get an email every time something like this or a monthly wrap-up or our monthly precious metals projections, anytime that gets posted, you won't miss any of it if you sign up for the newsletter. So again, you can do that at sprottmoney.com. All right. Peter, we have been soliciting questions for you from Sprott Money customers and from online. I've got a list of six questions. If you're ready, can I dig into the first one?

Peter: Yeah, let's go for it.

Craig: All right, my friend, this one, this is right out of the headlines, I suppose. We just last week got our latest update on consumer prices in the U.S. I think we all know now it's not transitory. This question gets more to the guts of the matter is, do you think the CPI is an accurate measure of U.S. price inflation? And if not, what do you think the actual inflation rate actually is?

Peter: Well, it's not accurate for a couple of reasons. And the biggest reason is it's not fully capturing the rental component, or you can call it the housing component. Rents make up about 30% of CPI and 40% of the core, and the Bureau of Labor Statistics is really dragging their feet in really capturing reality. You had CoreLogic the other day that said that rents in 2021, so a combination of new lease rents and renewal rent rates of an expiring lease with prices up about 10%, you had apartment lists said that new leases in 2021 were up about 18%. And the Bureau of Labor Statistics is telling us that rents are up about 3.5% year over year. So if you threw in a double-digit rent number in CPI, overall CPI would be about 10%. So from that perspective, it's not accurately capturing inflation. And then you can get into a whole discussion about hedonic adjustments and so on and so on, and everyone can quibble with it, but I'll stop with the housing one because I can't necessarily quantify the hedonic adjustment thing, even though it definitely understates the level of inflation.

Craig: Yeah. It makes me think of, I guess, kind of a follow up, one of the things I track is real interest rates, and the Fed's history of trying to keep real interest rates negative as a way of managing the debt. Even in this regime of hiking rates, do you think that's a valid idea where they're headed?

Peter: Well, it was negative real interest rates that helped to encourage all this debt. And then because of all the debt that gets created, then they are then trapped to stay in negative real interest rates. So it goes even deeper than that, but we'll see how far they can get and how less negative real rates will get because it won't be a while that we'll see at least zero real rates.

Craig: Yeah. All right. Well, let's go on to question number two. This isn't really a precious metals question but just equities in general, I guess. It gets to your expertise as a chief investment officer. Obviously, stock markets had a great run no matter how you measure it, one year, two years, five years, whatever, with all this liquidity. Can the stock market keep rallying though, even if the Fed goes on this tightening and rate hiking regime?

Peter: Well, if we look at what are the two main drivers of stock prices, one is obviously the earnings level and trajectory and speed of it. And then the other is what's the right multiple to put on that earning stream, and what we've started to see last year with a lot of big high flyers that valuations now matter, and a lot of it has to do with the changing monetary policy. It started to matter last year because that's when the market started to sniff out that, okay, the Fed is now talking about tapering, and then they started tapering. And now we're gonna end QE and shift to QT and raise rates, and all of a sudden multiples matter to people. So you have this multiple compression, which weighs on stock prices if it's not offset by faster earnings growth. And now you have the likelihood of an economic slowdown in response to higher interest rates, inflation, and monetary tightening so you have now stock prices getting hit in both directions. So I'd have to believe that we're gonna see a decline in earnings estimates and continued multiple compression, which equals lower stock prices.

Craig: Yeah, yeah. That makes sense. That actually tees up question number three pretty well, Peter. So nice work. One of the things on my site we've talked about since, geez, right after COVID got rolling back in the summer of 2020, it always seemed to me that some level of stagflation was a likely result. You know, coming back to the economy and people not going back fully to work, you know, and all of the Fed policies like QE to try to keep the economy going, it kind of seems we're headed that direction, and that was actually what the third question ended being, a lot shorter than what I just laid out, is the U.S. headed into a 1970 style stagflation?

Peter: Well, it'll be a version of stagflation where you have slowing growth and still sticky inflation. Now the inflation rate, which printed 7.5% for January, starting in March and April, the rate of change is going to slow. The question then is, how quickly does it get back to the pre COVID range of 1% to 2%? And does it instead settle out at something higher, more sustainably at around 3% to 4%? I think 3% to 4% is likely, at the same time, growth is gonna slow. So to me, that is a stagflationary type combination that we are in and heading for, you know, in a more pronounced way this year, even though, like I said, the rate of change on inflation is gonna slow, but growth is gonna slow at the same time while inflation, historically speaking, will still be elevated.

Craig: Yeah. No, absolutely. I think that is kind of a common idea at this point, too. I mean, we all kind of see that coming. I wonder what you think? Are you in this kind of policy error camp, you know, where people talk about the Fed's gonna hike only just to turn around and start cutting rates next year?

Peter: Well, the error has already been made by all the world central banks, and that was keeping policy too easy for too long and doing all this QE. So the policy rate's already taken place. And the inflation is obviously out of the bag. You know, so when you talk about a mistake, that's already done. But that's what the world we're in. We are no longer in, and we haven't been for the last couple of decades, we're no longer in standard economic cycles. We're in credit cycles. We're in credit cycles that ebb and flow with the cost of capital and then translates to how much debt we can accumulate. So when the cost of capital goes up and monetary tightening takes place, growth inevitably slows. You can't separate out the two.

Craig: Right. Right. Okay. Well, hey, we're having so much fun we're already halfway done, Peter. This one, I'm gonna go off in a little different direction for question number four. As we record this, this is the 17th, I think it was just yesterday, crude oil hit $95, which was just remarkable. Still over $90. What's driving crude oil prices higher and how high can it go?

Peter: Well, the main backdrop is a world that is getting past COVID and a large part of the world, we still need China to accept that fact that you don't end COVID by shutting down. And once they realize that, which I think they're coming to that realization, then you'll get even more demand for crude oil. At the same time, you've had obviously a more subdued pace of investment where a lot of the big oil companies around the world are just keeping investments flat. And I think that leads to higher prices. Now, on one hand, I mentioned China fully opening up at some point, that will increase the demand. On the other hand, if you go into a recession in the U.S. and other parts, then that will reduce demand, but at least on the supply side, you're not getting your historical response to higher prices, which means that we're gonna see sustainably higher prices. And while oil can easily correct the $70 to $80, we will make a higher low on any pullback with odds ever increasing that we'll be seeing over $100 for a period of time.

Craig: Well, it would certainly seem to add to that policy error stuff, right, with energy costs soaring like that.

Peter: Well, it just adds to the problem that the Fed and other central banks have put themselves in. You know, I read an article today on, is the ECB gonna make a policy error. And I'm thinking, well, they made the policy error back in 2014 by going to negative interest rates. That was a policy error. And then they compounded it by keeping it there for almost eight years.

Craig: Yeah. We'll see where they go from here. All right. Let's go to question five. This is kind of, I guess, a big-picture question that was sent in, Peter. What happens, maybe we should say if not when, but what happens when confidence is finally lost in the U.S. dollar as, I guess, a world reserve currency maybe is what this is about? Does a gold standard or some type of sound money system return?

Peter: Well, confidence is gonna be lost in many different currencies. Obviously, the dollar if it were to happen would be the highest profile. We'll have to see how the Fed plays its hands here with respect to inflation and where they take policy. Do we go back to some standard? Maybe. It certainly won't be a gold standard, but maybe a commodity-based standard, but, you know, this is all just theoretical pontification rather than, you know, something that's gonna happen anytime soon. I mean, we're on this new currency regime now for, you know, 50-plus years since we went off it and you're not gonna so quickly shift back. But there's no question that the current regime is gonna get well tested here over the next couple of years with the pace of inflation being where it is, even though it'll moderate in the context of still zero rates, negative rates, and these massive central bank balance sheets.

Craig: What do you think, Peter, this idea of, you know, like currently in the crisis around Ukraine and the U.S. imposing sanctions and Russia grumbling about, you know, maybe getting kicked out of SWIFT and growing alliance with China, do you think regional alternatives could rise to the dollar, you know, that we haven't seen yet, I don't know, something, some kind of combination, some new kind of Eastern-based financial system?

Peter: Well, it's already beginning to happen. I mean, Russia and China are trading oil in euros. I'm sure there's some trading in yuan as well. You have China that's obviously pushing a central bank digital currency, which would completely turn upside down the global, you know, currency markets and have the world less reliant on the U.S. dollar as well. So a lot of this transition is definitely in motion and will only continue. I mean, even just from a central bank currency reserve standpoint, you know, the dollar has lost market share and will likely continue to do so.

Craig: All right, Peter, I got one last question. It finally deals with gold and silver. And it's just simply, I mean, do you own any gold and silver? Do you have a forecast for gold and silver prices by year-end? And then within the money that you manage, do you own any mining shares?

Peter: So for clients and myself, we have a pretty big position in precious metals. Pretty much gold and silver, not the others. And we do also own miners and as I do myself. And I couldn't be more bullish on the space. Obviously, 2021 was pretty disappointing considering the inflation rate we saw. I entered 2021 believing we were gonna see much higher inflation, so I was right on that, but certainly wrong on the performance of gold and silver. But I think that came in the context of a very good 2020, and the market's belief that either inflation was not transitory...or, I'm sorry, was transitory, which was proven wrong, of course, and if it's not transitory, well, the Fed would come to the rescue and they would quickly tamp down on inflation and everything would be fine. And I think people are realizing, well, that's unlikely too.

And what the Fed is gonna do is tighten us into recession, which will then have them stop tightening probably at a rate well below the rate of inflation and that negative real interest rates will remain with us for a long time. And that once the Fed stops raising rates below the rate of inflation, that will then sacrifice the dollar, which would also be the second kicker for gold and silver. So I think gold and silver bottomed in...the day after the December Fed meeting, when ironically they said that they're quickening the pace of tapering because I think, again, people started to shift their attention to what this is all going to mean for markets and the economy, and it would mean very little for inflation because even if the Fed raises five times this year or six times, they would still have that Fed funds rate below the rate of inflation. And that's why the bond market thinks the Fed will be done by 1.75% to 2%. And as we've seen over the past 40 years, every rate hiking cycle takes that terminal rate below the rate at which it peaked in the prior cycle. And I think that's what gold and silver is sniffing out here.

Craig: Yeah. How about the mining shares? Just one last thing, as we record, I think it was just yesterday, Barrick had a pretty good report, but man, they've had a tough deal with margins getting squeezed over the last 12 months or so. What do you think of the mining shares as an investment?

Peter: They had a good report. They announced a stock buyback. I think a lot of companies are generating a ton of cash, especially when all sustainable costs are probably $1,000 to $1,200. No question, there's been pressure there, but now that you have gold prices and even silver with it rising, a lot of these producers are gonna make a lot of money and they're dirt cheap and they've been left for dead, no one cares about them, and that's the time when you wanna start investing. And I see now is the time. I mean, I've been in these things for the last couple of years, so I've been lugging the miners along but, you know, when you think about gold at just about $1,900 here, a way to look at it is that it's only about a $100 plus from a $5,000 year high.

Craig: Yeah. That's a good point. That's a good point. And again, you mentioned sentiment, that certainly seemed to hit rock bottom. It may still be pretty close, maybe just an inch off the bottom at this point and that's usually a good sign too. Again, we've been speaking with Peter Boockvar, who is the chief investment officer of Bleakley Advisory Group, and he's also the editor of his own newsletter called "The Boock Report." Peter, tell everybody a little bit about that and where they can find out more information on your newsletter.

Peter: So "The Boock Report" is just a subscription-based newsletter where I write daily missives on the macroeconomic and market outlook, give my opinions on things, also, give ideas when I feel the time is right. And it's succinct, it's quick, it doesn't waste people's time. And my subscribers know that the only time they get an email from me is when there's something important to say. And then on the money management side, they can go to bleakley.com if they're interested in wealth management services.

Craig: Terrific. Terrific. And again, just a reminder, this is all brought to you by sprottmoney.com. If you agree with Peter and I, and think that the precious metals are sure...at least have a place in your portfolio, visit sprottmoney.com. We always have great deals on bullion, but also bullion storage. Just go to the website, sprottmoney.com, or, of course, just pick up the phone and you can talk to an actual human being to help you out. That number is 888-861-0775. Peter, thank you so much for your time. It's very good to make your acquaintance, and you've certainly had some great information to share with us.

Craig: I really appreciate getting the opportunity to be on, and there were some good questions there.

Peter: Well, thank you. And from all of us at Sprott Money News and sprottmoney.com, thank you for listening. We'll have another "Ask The Expert" segment for you in March.