Ask The Expert with Peter Boockvar

Presenter: You're listening to "Ask the Expert," on Sprott Money News.

Craig: Hello again from Sprott Money News and sprottmoney.com. It is May 2023, and it's time for your "Ask the Expert" segment. I'm your host, Craig Hemke. Joining me this month is Peter Boockvar. Probably familiar with Peter. You've seen him in financial television, financial magazines. He is the chief investment officer of the Bleakley Financial Group, author of "The Boock Report," we'll talk about that in a second, and a frequent guest here at Sprott Money. We've had him on before, and it's good to have him back. Peter, thank you so much for joining me.

Peter: Thanks. I appreciate having me on.

Craig: And hey, before we get started, the usual reminder. This content offered free of charge by Sprott Money. All they ask is two things. One, you keep them in mind anytime you're in the market for physical precious metal. You go to sprottmoney.com, or give them a call at (888) 861-0775. Or, if anything, throw them a like or a subscribe on whichever channel you're watching or listening to this content. That helps them spread the word, from all that internet stuff. So, anyway, Peter, and before we get started, I wanna ask you this. Tell everyone about "The Boock Report," and if they're interested, how they can find out more information?

Peter: "The Boock Report" is a macro and market economic commentary that I give each day. And it was, basically the work that I've done for a long time, putting together my thoughts on a daily basis. And a subscriber can trial it for free, or they can subscribe if they're interested. And, try to make it quick, and sweet, and short, and succinct, because I wanna be respectful of everyone's time and all the information and emails they get out there.

Craig: I think people have heard me say on this platform, and every place where I get interviewed, that, I mean, this is a year where you need as much independent and objective information as you can find. And you don't wanna just swallow what the financial media is telling you. "Boock Report," something I would encourage people to check out. Is there a website, a URL people can go to, Peter?

Peter: Yeah. It's B-O-O-C-K report.com. So, play on my last name. So, www.boockreport.com.

Craig: Perfect. All right. Well, thank you again for agreeing to join us once more. It's a very interesting time to be monitoring the financial markets. No doubt about that. There are so many cross-currents. Who do you believe, what indicator do you believe, which market do you believe is telling you the direction where we're headed? I wanna ask you about four separate topics, so we might as well just dive right in. The one that's making headlines, every single day it seems here in May, is this debt ceiling, whatever you wanna call it. Theater, process, whatever it might be, in Washington, D.C. What are your thoughts on this? Is a hike of the debt ceiling inevitable? We're watching one-year treasury, or one-month treasury bill rates go through the roof, U.S. credit default swap rates go through the roof. What do you make of all this, Peter?

Peter: Well, there has never been a time where it has not been raised, and this time will be no different. If I had a dollar for every time I heard some politicians say, "Oh, it's gonna be a catastrophe, or a calamity, if it doesn't get raised," it always gets raised, and it'll get raised again. And the only relevance it has to the rest of us is maybe there's a day, if the last, sort of, "ex date," as they call it, is on a Thursday, maybe they miss a payment for a day, and we waited to the next day. But I just don't think that these politicians, as tough as they talk, even wanna sort of test that out. So, this is gonna be an end up non-event, as they always are. And with the, like you said, a lot of theater. And then we'll move on. But it's, I think it's really more emblematic of just a bigger problem, that, you know, we have this ever-rising level of debt, that's generating less and less economic growth, and, you know, just, that is the bigger problem. Not the debt ceiling in itself, it's, that debt ceiling is more just symbolic of the debt challenges that we face, that is now being, sort of, more enhanced in terms of the negative possibilities by the very sharp rise in interest rates.

Craig: I wanna ask you a follow-up question. I don't know if you have any opinion on this at all. But every time this comes up, I see people on Twitter...I mean, otherwise what I would think are logical... Maybe I'm missing the point, but what do you think of this trillion-dollar coin thing that gets floated? Do you have any thoughts on that?

Peter: I think it's just economic nonsense from, you know, Paul Krugman. I don't think it's... It's crackpot economics. It's, let's come up with a gimmick. Make it sound funny and good. Maybe not funny, but sad instead, and think that that's gonna solve our [inaudible 00:05:26] problems. But it's just a nonsense gimmick.

Craig: Certainly would seem that way. That's what I mean. And people that kinda go along with it, I mean, and wouldn't you think, Peter, if $1 trillion coin was a good idea, wouldn't $32 trillion, or 32 of them be a good idea?

Peter: Well, let's just do what the Venezuelans do, and just print all the money, and be able to cover our debt. That sounds like a great idea.

Craig: Make life easier for everybody, apparently. All right, Peter, I wanna move on to the second question because, you know, as I often frame it, you know, the Fed got behind the curve with all that "transitory" stuff, and they rushed to catch up with all those rate hikes, at a pace that they'd never done before. And now you're getting all these, you know, as Rumsfeld used to say, the unknown unknowns, you know, the unintended consequences. And the most recent one is all this trouble with the regional banks. Chair Powell, a week ago, tried to say that that was it, just those three, we could draw a line under the crisis at that most recent failure of First Republic. What do you make of all this? Is it over, or is there more of this regional bank stress to come?

Peter: Well, what makes this current banking situation unique is sort of the sequence of events. You know, typically, banks get into trouble only after an economic downturn has taken place. The economy slows down, businesses and consumers renege on their debts, credit quality weakens, delinquencies rise as part of that. And then that damages the balance sheets of those banks that way extended themselves, and they either go out or they have to raise capital and so on. This is unusual in that the tip-off was the banks that extended out on duration. It's in response to, obviously, the very sharp rise in interest rates, rather than a credit issue. And that is what created the run on the banks, even before any notable deterioration in the economy. And then, of course, you throw in the wide spread between the deposit rates that they were offering versus what someone can get in a risk-free money market.

So, we haven't even really touched upon the upcoming credit cycle. So, this is very unusual and very unique. So, I would say that the balance sheet duration stress, those that failed, experienced, I think that is somewhat calmed, particularly with the Fed's new facility where they'll take, you know, 80 cents on the dollar mortgage-backed securities and treasuries, and lend against them at par. That, to me, is probably in the past. But what we now face is the credit cycle. It's rising delinquency rates. It's stress in commercial real estate. And it's those banks that have loan-to-value, or I should say, loan-to-deposit ratios, that are too high. I don't think that that's, that we're gonna see too many of that. You know, the historical loan-to-deposit ratio is about 70%. Right now, we're about 60%. So, I don't necessarily expect another round of many bank failures. We'll certainly see some. I just think that the real challenge and risk here is just a general slowdown in the extension of credit, that is, to me, what is the bigger problem that we all face right now. Particularly in commercial real estate, where the banking sector is pretty much extending no new loans.

Craig: Well, and that leads us right into the third subject. Where's the Fed headed with this? That's been inevitable consequence, as you point out, credit being kind of reined in, and exacerbating the economic slowdown that's already upon us. Fed Funds futures are pricing in three, maybe even four rate cuts before the end of the year. Powell and everybody that works for him are trying to say there would be no rate cuts before the end of the year. What do you think, Peter?

Peter: Well, the Fed has been so thoroughly embarrassed over the last couple years by their grand miss on inflation that not only do they take interest rates as high as they did as fast as they did, I think they're gonna be very reluctant to give up the fight. I think they're done raising, but I think the market is, to your point, has gotten ahead of itself in the extent of the amount of cuts that we'll see. I do think they'll cut maybe once, maybe twice by the end of the year, 25 each, but that would still only take us to, you know, 4.5 and change in the Fed Funds rate. Now, pushing out, the Fed Funds futures market is pricing in about 200 basis points of rate cuts. But even if the case, we would still be at 3%. That's a far cry from zero.

So, I do think we'll get some cuts, but the idea that we're gonna somehow go back to zero, and QE, and just the salad days of easy money, I think those days are over. And, you know, I still hear people that say, "Oh, yeah. They're just gonna go back to zero." Like it's nothing. And I highly disagree with that belief. But they will cut, but it's gonna be much different than the rate-cutting cycles that we've gotten used to, because I think inflation, yes, it's moderating, definitely will continue to through the end of the year, but I think a higher rate of inflation is something we're gonna have to get accustomed to. And there are also risks with another round of aggressive easing, because the dollar's gonna be very vulnerable to that. And I think you're just gonna reignite inflation again, and I think that's the last thing that the Fed wants to do.

Craig: Do you think, as we get deeper into the year, and get closer to an election year in the U.S., will political pressure play into how the Fed acts?

Peter: Well, there's always that. It was 2021, I believe, when Joe Manchin wrote a letter to Jay Powell, saying, "Hey, Jay, you know, you got an inflation problem that you have to deal with." And then fast-forward, a day before the FOMC meeting on May 3rd, Jay Powell gets a letter from Bernie Sanders, Elizabeth Warren, and some others, saying, "Hey, you gotta stop cutting..." I'm sorry, "you gotta stop raising." So, there's always gonna be that. I think that as long as Powell is residing over the Fed, he will be least influenced by political pressure, because Joe Biden didn't want him to be Fed chair. Biden wanted Lael Brainard. So, Powell doesn't owe Biden anything. So he's gonna be much more focused on his own reputation and legacy than what Elizabeth Warren or Joe Biden thinks he should do. As long as he's in that chair, I think the political winds will mostly affect his colleagues more so than him individually.

Craig: Makes for a very interesting back half of the year, that's for certain. Yeah, but you're right. I can imagine it would take a pretty significant crisis to get the Fed to cut as quickly as they hike. Do you agree with that?

Peter: Yeah, but they'll cut, because... The big question for the Fed right now is what is the level of real interest rates will they be comfortable with? And I'm talking about where the Fed Funds should be relative to a sustainable rate of inflation. Now, we don't know yet what the sustainable rate of inflation is. All we know is we're on the backside of an inflation spike, and where that not just settles out at on the downside, but settles out on a sustainable basis. So, let's just say we get to 3% by the end of the year in inflation. That's a far cry from 1% to 2%, which we were accustomed to prior to COVID.

Okay, let's just say it's 3%. Well, is the Fed comfortable with a real rate of 200 basis points, which it would be if they kept rates where they are today, relative to that 3%, or do they want it at 100 basis points, which would give them room to cut 100 basis points? Are they comfortable with a real rate of zero, which... So, I think that question remains to be seen, but I do think a 3-handle on inflation in the back half of this year, which I think we'll head to, will give them some room to cut, if they choose, in response to what I think is an inevitable recession.

Craig: So, Peter, that leads me to my final question. I mean, this is Sprott Money. We like to talk about owning physical gold and physical silver in an environment like this. Had a heck of a year already, with golds up nearly 10% year-to-date. As you know, real rates a big part of gold prices over the long term. So, as you put it all together, looking ahead, the current crises, where it's all headed from here, what are your thoughts on gold, and at least its price trajectory, in the months to come?

Peter: Well, in 2022, gold absorbed a lot of body blows. A vertical rise in interest rates, and a 17% rise in the value of the dollar, from January through October. But with the dollar, and I'll start with that, I think what we learned from June 2021, when the dollar started to take off, that coincided with Jay Powell at the FOMC meeting then saying, "We're finally talking about tapering QE." That's what lit the match for the dollar rally. And when did the dollar rally end? Right at the end of October, just as the Fed was ending their cadence of 75-basis-point rate hikes per meeting, which they did four in a row. So, that's... And the dollar, obviously, has weakened since, as they've now calibrated it down to 25, and now the bond market, obviously pricing in cuts.

So that tells me that the dollar rally has been solely predicated on the Fed being more aggressive than others, and that's what generated the dollar rally, and then put a lid on gold. Well, that Dollar bull case, to me, is now over, as the Fed is likely done. And now, I think, gold just has to deal with the real rate story that you talked about. But if the Fed starts cutting rates, which they will at the back end of the year, I think inflation's gonna remain sticky, that, I just don't see the bear case anymore for gold and silver. And, you know, anybody who's been in the markets long enough knows that if you can absorb the bad news, well you're gonna be set up really well for when the news starts to turn in your favor. And I think we got a taste of that this year with gold going above $2,000, even though it's now below it over the last couple of days. But I think it's now ready to sort of take off, because that bear headwind of higher rates and a stronger dollar are in the rear view mirror.

Craig: And as, again, your title is chief investment officer. Just in a nutshell, where do you see gold in a portfolio? As an inflation hedge, a monetary hedge? How do you look at it?

Peter: Well, in a portfolio which I manage, you obviously have to balance out, you know, your desire to own gold in any kind of environment, but at the same time, knowing that there are times to own it, and from a portfolio standpoint, times not to own it. And I felt that in a world of negative interest rates, zero interest rates, and a lot of QE, it was a world that you'd wanna own it. Now, outside of Japan, we really don't have negative rates anymore, but we don't have rates that much higher than that. So I think it's an important part of a portfolio, but I will be honest and say that there'll be a time when I sell my gold, in the portfolio. Physical, I think someone should always own physical gold, forever, and pass it on to their descendants. But in terms of a portfolio, there'll be a time to sell it. But I believe that that will be at much higher prices.

Craig: Sounds good to me, Peter. And again, thank you for your time. We've been speaking with Peter Boockvar, who is the chief investment officer of the Bleakly Financial Group, and author of "The Boock Report," which you can find at B-O-O-C-K report.com. Peter, it's just been great, and very, very helpful, and I very much appreciate your time.

Peter: Thanks for having me. And I appreciate being on.

Craig: And from all of us at Sprott Money News and sprottmoney.com, thank you for listening. Be sure to give us a like or a subscribe on your way out. We'll have some more content for you later on this month.