Fed Stays Steady & The "Sell America" Trade with Peter Boockvar
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Welcome to the Risk Reversal Podcast. I'm Dan Nathan. I'm always joined by Guy Donovan. Yes, you are. How are you, Guy? I'm strong to very strong. Guy's all fired up for two reasons. One, we have one of our most favorite guests who's joining us today. That would be Peter Bukvar. He is CIO at Bleakley Financial Group. Peter, welcome to the pod.

Great to be here. I say all the time, if you don't follow Peter, you're doing it wrong. You're doing it wrong. So there's a couple of places you can follow Peter. That would be on the Twitter. You can also subscribe to the book report. It is spelled B-O-O-C-K-V-A-R book report. And then there's no bar in it.

The other reason why we're really fired up today is that guy just got to spend. You know, bar is something. Bar is value at risk. Value at risk, yeah. So guy, well, as a CIO and economist, I mean, Peter knows that very well. It's a really important metric. But guy, you just got to listen for about 45 minutes to Fed Chair Powell. You were following on every word that came out of his mouth. But Peter, you actually were doing some very good work on it. You were writing for the book report as it was going on. I think...

I thought a lot of the folks, a lot of the questions were getting all up in his grill. So give us a sense about what you heard, what's changed from the last meeting, and then maybe a little bit of the sentiment commentary that you heard from the press. So we have to understand the mentality of the market going into a press conference, because typically the statement itself, which came out at two o'clock,

is not really market moving ever. It typically is only tweaked from the prior meeting statement. There's no real messages that are typically sent in these statements, or at least what we've seen so far this year. So the mentality of the market is they're looking for any signal whatsoever from Jay Powell. They're like, just give me some hint of dovishness. That's all they want to hear.

That's their bias. That's where they lean. The finger is on the buy button. Just please give me some dovishness.

And Jay just didn't deliver for those looking for that. While you can certainly make an argument that it's getting close to cut, he said time and again throughout this press conference is we have to wait to see the impacts of the tariffs. We have to see what the flow through is. Maybe it's one time, but maybe it's not. Let's just wait to see what the final rates are. Let's just see this. Let's just wait on that.

That was sort of the message that he presented. And and

That's why I think while yields are still down on the day, but they're off their lows, I think, in response to that sort of persistent message throughout the Q&A. And I think that's also why stocks, which were, again, looking for any hint of dovishness, backed off as the press conference progressed. And the market's still trying to figure it out. But I'm going to basically read to you what they said. And you tell me what you think this means. They lowered their GDP forecast for this year.

to 1.4 percent they raise their inflation forecast to three percent that doesn't sound like a particularly good i mean that as we say dan is a bit of a witch's brew and it's something that danny moses has talked about you've talked about dan's talked about i've talked about it

That's a problem because they can't sort of – they don't have the tools in their toolbox to extricate themselves from that. So those forecasts have tariffs written all over it in terms of it raising the price level this year and cutting inflation.

economic growth. Now, they at least when I say they, the median dot plot assumes that the tariffs in this year in year one call it will have a one time step up in price because next year, they foresee PCE falling from 3.1 back to 2.4. So they think that is a one time price level. But, you know, Powell said, Yeah, that could be the case. But maybe there is some flow through, you know, I think it's

Because obviously, this is a big debate. Is tariffs inflationary? Is there a potentially deflationary? Because it hurts demand with the price increase. Or is there a flow through? Or is it not? And I understand all sides. But I think it's too cute to think, OK, it's just a one-time price thing. And then, therefore, it's not inflationary. And there's no flow through into next year. And Jay Powell should look through it. Because when you are disrupting global supply chains--

That just doesn't get cured like that. It could be a multi-year time period of manufacturing facilities shifting into different places. Maybe less goods are produced and maybe that's deflationary. So there's so many moving parts here that I don't think is not just an easy one-time thing.

And also, you know, bigger picture, and I'm using this as an example in terms of what can be a multi-year impact from tariffs, is we know rents is the biggest part of CPI. Well, if you just, if I'm a multi-family builder or landlord, well, you just raise my construction costs. Cost of capital is still high. Rents now are moderating. And I'm

I'm not going to look to build a multifamily right now. Well, that means that in next year or the year after, there's going to be less supply and rents are going to go right back up again. So I think people need to just do a little deeper analysis when they think about these tariffs.

outside of just a theoretical economic, yes, it's a one-time price step up and that's it. And the Fed should just look through it. Yeah. And that seems to be the one thing that a lot of the journalists who are asking questions got hung up on, right? It's just like, listen, if you're a forward-looking data guy, it seems pretty clear that that's the only thing that you're kind of, you know, hanging your hawkishness on, if that makes some sense. But Peter,

Sometimes I hear this from some cynical folks. Maybe it's in the financial media. They say Peter Bukvar from Bleakly Advisors. You know what I mean? So it's bleak? Yeah. Sometimes you just have a bleak view. I think as an economist, you call it how you see it. You're not always making calls.

Really, are you attaching your views on the economy to let's say the stock market? Now obviously you have views on rates and currencies and the like here. If you were to take like a sort of silver lining approach here, I heard Fed Chair Powell say on a couple of occasions, at least a couple of occasions,

The economy is in good shape, right? They're focused on their dual mandate. They feel like unemployment is at a level that they feel pretty good about. If you think about it, nine months ago or whenever it is, when they were cutting interest rates in September, they were concerned about the jobs market here, right? So do you believe that the economy, let's just say we are not going to get a big price shock, right, from, let's say, tariffs and the geopolitics, that the economy is in a good spot here?

and maybe it is opening the door where in the not so distant future they may have more than two 25 basis point cuts. - Well, I'll start by saying managing other people's money, my viewpoints can't be any biases. It has to be what I see as fact

because it's reflected in my investment process. And if I'm just biased in one direction, I'll never survive and I'm going to lose money. So when I express things, I try to be honest with what the environment is like. And there's something called risk management where a good money manager always has to be looking and watching their backs. Now, in terms of the question,

So I like to break down the economy into different pieces in order to sort of look under the hood and see what the influences are, because then I think I can get a good handle on what to look at that can tilt it to the upside or tilt it to the downside, which would then influence what Jay Powell might do. And for the last year in what I see, most of the economic growth or all of the economic growth that has really come from just a few different places is

Now, when I say a few, they're still big drivers, like enormous amounts of government spending, upper income spending and anything related to AI in terms of capital spending and that build out. But there are also a lot of pockets of weakness. I mean, the U.S. economy and the housing industry, we're doing about four million, four million homes in terms of existing home sales per

1978, we were doing that same level of home sales when the U.S. population was about 100 million people less. So just imagine all the ancillary activity that doesn't happen when you don't get a turnover in the sale of a house. And just to put a number around it, the National Association of Home Builders estimates that the housing industry, including everything, including Home Depot and and and

real estate agents and lawyers that do closings and the actual sale of homes and building 15 to 18% of the economy. It's a nice chunk. You got manufacturing that's in a recession. You have lower to middle income spenders that are in their own personal recession. You have global trade that's muted, and now you have the pace of hiring slowing. So the economy is still hanging in there, but it's a very mixed situation. Now, I think

The Fed will start cutting in September because I think the unemployment rate and the trajectory of the labor market is tilting to a higher unemployment rate. And I don't think you're going to need much for Jay Powell to say, you know what, let me throw in a cut.

You know, one of the reasons why all these reporters and people on Wall Street was like, what's wrong with Jay Powell? Why is he not cutting? Because they see the ECB is cut. The Bank of Canada is cut. The Ricks Bank cut overnight. And they see all these other central banks that are cutting. But, you know, Jay doesn't care about what those central banks are doing. He's trying to focus on himself and what he sees. But I think that the

in a not an event, but a process, the economy is slowing this year. We will have, I believe, a one handle on GDP growth this year as we absorb the tariffs. And I've made this now since in my writings, and I'll say it again. Right now, the U.S. government collects about $525 billion of corporate income taxes at a 21% statutory rate. That implies back in the envelope that we're doing about $2.5 trillion of pre-tax income.

If you have a 10% baseline tariff, and we'll see where this ends up, of course, on $3.3 trillion of imports, that's a $330 billion tax. You take the 330, you add to the 525, you essentially have an effective corporate tax rate of 34%.

So just to put a dollar amount around the tariff increase, we've essentially taken away or Trump's essentially taken away his entire corporate income tax cut of 2017. So we can't pretend that the tariffs are going to have only a negligible impact on economic activity.

And I think the Fed believes that, too, whether they're right or not, whether I'm right or not. Well, we don't know. But that's why they're cut. They cut their GDP forecast for this year down to one point four percent. The other thing is, is that let's just say and people say, well, tariffs are OK if the consumer doesn't need it. Well, it's not OK because it still is going to get eaten by somebody. Maybe some of it will be the exporter to us, no doubt. But.

maybe it's the company itself, maybe corporate profit margins start to get impacted. Keep in mind, corporate profit margins are record high. So if you get any degradation of profit margins, that affects obviously hiring and potentially multiples and a flu through into the stock market. So I guess bottom line is I do think that Powell is going to have reason to cut in September and I would think he would cut in December. But to take this one step further, we know the lesson from last year is that doesn't mean long rates go down.

You know, Elizabeth Warren was on CNBC today. Yeah, the Fed needs to cut because we need to ease the burden on homebuyers. Well, there was no easing of the burden on homebuyers when they cut 100 basis points. In fact, the burden actually was more because the 30 mortgage rate went back to 7 percent in response.

So this is a very tricky situation because we're learning firsthand that the Fed can only control the short end here and the long end is going to do its own thing. Which is something we've been saying for years, and it just shows a general lack of understanding on their part or maybe not lack of understanding. I mean, their reluctance to basically admit what we all seemingly know.

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Now, I got a couple of questions, but I won't throw them at you at once. My first question is this. I'm with you on the labor market. I see deterioration as well. I'm shocked that it hasn't gotten worse quicker. But this is a quote out of Jerome Powell. Labor market isn't crying out for a rate cut. I mean, he clearly chooses his words. So what do you make of that? Because he sees what we see. So I think he's obviously relying on the BLS report, but.

Why we had a 4.2% unemployment rate in May was because

After seeing a drop in the household survey of 695,000 jobs, it was pretty much matched by the drop in the labor force. So he's viewing the number 4.2 very superficially. If you look at the ADP report, I think it was 37,000 jobs only created. We're seeing this uptick in jobless claims. The four-week average in initial claims is at the highest level since August 2023, and

The continuing claims continuing to hover around November 2021. But, you know, in a way that's understandable.

The tariffs slapped on the entire world. You don't have to be just a manufacturer in the goods sector to say, OK, wow, I just got a lot thrown at me. Let me just take a pause on hiring because I heard somebody this morning on TV saying, well, you know, we're a service driven economy. Therefore, we're somewhat immune to tariffs. Well, that's also a superficial thought, because look at the transportation index.

or I should say the transportation stock, they're a service business, but they're delivering all the goods that are made. If there's less stuff made, there's less use for trucks and cargo planes and ships and so on. And if there's less use for that, there's less activity at the ports,

Well, these port workers collect money and they go out for dinner or they go on vacation. Those are services. So you can't just say, OK, we're a service economy. Tariffs don't impact me. There's flow through. So I think from a business standpoint, particularly small businesses, you know, that's one thing in the ADP report. We're seeing small businesses that are not just slowing hiring. They're actually shedding workers.

Because that's their knee jerk reaction to the lack of visibility in their business. So the tariff stuff is just have thrown a lot of mud in the gears of business. And businesses are responding in kind by calling a timeout on some of the things they're doing. Now, again, some parts of the economy like AI, you know, Mark Zuckerberg is not going to, you know, slim back.

on AI spend because of tariffs. He has a goal in mind and he wants to build out his models and he wants to recreate his business in a certain way. And he's going to go ahead with that. And other businesses are going to do the same, but there are other businesses that just don't have that financial flexibility or agility to do that. And they're sort of pulling back.

So with the backdrop of what we just talked about, and this is an opinion question, is it better for the Federal Reserve to be early or late to cut rates? So it's a great question. And when Steve Leisman sends out his quarterly surveys, which I take part in, and right before Fed meetings, one of the questions is one of the risks is exactly to that question. And guy, I'm not sure. Because

So it's really tricky because we have to ask ourselves, those that beg for rate cuts have to ask themselves, okay, what economic activity is that going to sort of release? What pain point is that going to release? Now, it'll certainly release a pain point on someone who borrows on the short end of the yield curve. So for plus, well, if they can get a rate cut, they're better off. But if I'm in real estate and my bank is lending to me off the five-year rate,

I don't, is the five-year going to fall too much if the two-year drops or the Fed funds drops? Maybe, but look at the response in the 10-year. Maybe the housing market gets worse upon rate cuts. So,

you know when people think about what the fed does is what are they actually restricting what are they actually easing and are is someone going to hire more people because the fed funds rate by year end is going to be between three and three quarters four instead of four and a quarter five four and a half

maybe, but I'm not so sure. And then I have to believe also you throw in this move in oil prices, which may not last, but that also throws a little bit of a curveball to Jay Powell and friends. So here's my final question before Dan jumps in. Do we talk too much about the Federal Reserve? I only say that because Jamie Dimon has made comments over the last couple of years that we pay way too much attention to Fed speak. And I sort of understand what he's saying. And

And to a certain extent, I think you're saying it as well. I mean, they can control, I think they could cut rates today and I don't think necessarily it's gonna help anything. And I guarantee you, I think the bond market would probably react poorly to that. But do you think we sort of dissect this stuff too much? Have they become too, I don't know, too visible in terms of the market and what we discuss seemingly on a day-to-day basis? - Well, there has been no institution in the world outside of maybe the BOJ

that has put their thumb on the scale of the economy and the markets than the Federal Reserve. I mean, they are in the price fixing game and they wake up every day thinking about what do they think, these 19 people sitting around this mahogany table in Washington. So what should the right rate be overnight? It is like right out of the Soviet Union. So it's hard not to dissect what they do, particularly in the era when

Greenspan took the overnight rate from five and a half to one and all the housing craziness that that created. And then it goes from, you know, one to five and I'm sorry, six and a half to one, one to five and a quarter. Then the housing bust in QE. It's like, how do you not talk about the Fed? Because.

the Fed was so influential on economic activity and markets where markets did not go up or down based on the economic outlook and corporate earnings. Markets went up and down based on what they thought the Fed would do. Now, right now, post 2022 and the rise in inflation, and you could argue that the Fed has become much less relevant.

And maybe the Fed is more a prisoner of the markets and inflation that they created and market influences on the yield curve. And maybe they're less relevant. So, yeah, maybe now going back to the 1980s, they're much less important.

but that is a victim of circumstance, not because they don't want to be. Understanding that there are situations that require some sort of intervention every few years, let's just say.

let me ask you this question should there be a federal reserve or should let or and i'm being i asked that in a serious way dan snickering but what if you just let the free market decide where interest rates were and the only need for that type of entity is if god forbid something broke well yeah so i do think that if there's a way to say okay let's have an entity like the fed that if something breaks they are the lender of last resort with collateral

and whatever sort of internal plumbing that needs fixing, they can help. But in terms of pricing the overnight lending rate,

Well, why can't banks do that? We do that with SOFR, right, in a way. Now, granted, that is sort of using the Fed funds rate as a benchmark. But why can't the market just set the overnight rate just based on the supply and demand for money, which I think is very doable. And the Fed can sort of stick to other responsibilities within sort of a backstop within the system. I think that's doable. I think that's what should be. You know, the thing about markets is markets get things wrong a lot.

But when they get it wrong it quickly adjusts whereas the Federal Reserve when they get things wrong they either keep doing it wrong or it just takes them a long time to adjust and

And I think that's what the beauty is of markets, more flexibility rather than this institution, you know, sticking their finger in the air saying, OK, what should the right rate be? Yeah. I mean, listen, I didn't snicker like in a condescending way by any means, Guy. I just like, you know, it's something that I've known no other way. You know what? Like the Federal Reserve existing. And if you think of all the kind of

I don't know, seats of government that exist right now. It seems like this independent body is probably doing a pretty good job. They've been a pretty steady hand. The idea that we would let the largest financial institutions help set that policy is something that would be a disaster waiting to happen. All we have to do is go back to the financial crisis and think about the deregulation that led to these institutions almost taking down the financial world as we know it. But again, we could debate

that for the Treasury market. I initially. Yeah, thanks. It could be just the Treasury market and market participants that, you know, buy and sell the Fed funds. Look at the dislocations now in the Treasury market. Right. I mean, in some ways, you know, having that Fed funds rate stuck there at four and a half percent for the last nine, 10 months.

is something that is a guiding principle. And one thing that Fed Chair Powell said, I think was interesting, related to a question about communication, about how they do it. He said, "More is not exactly better, but better is better." Which I thought was kind of interesting. And I think Fed Chair Powell, and I know Guy, you've given him high marks when he's deserved it over the last few years, is that he doesn't over-communicate, in my opinion. There is a certain schedule that these folks get

kind of pulled into whether they be the House, the Senate, you know, a whole host of other things. And they have to be somewhat verbal, if you will. Let's I know we only got a few more minutes here. Let's talk about you just mentioned, you know, what might happen, you know, to yields if the Fed were to lower interest rates. Right. We know what happened last September, October.

What do you make of this sort of sell America trade? You were on Fast Money earlier in the week. We were talking about this as far as you put some nice parameters around kind of dollar holdings, you know, U.S. here and what you feel about, you know, treasuries and

essentially, what do you make of yield stuck here? The dollar has bounced a little bit, but it's still at those levels where we were in the throes of a market sell-off in April. How important is the dollar, the Dixie around 99, up from about 98, and the 10-year U.S. Treasury yield stuck here, what are we, like four or four or something like that, and up or down five or so basis points? What are your thoughts and how important is that to investors in the stock market right now?

So, yeah, the dollar index here on the 98, 99, that's sort of a level where it was in March 2022. So you're three plus year lows in the dollar. And the sell America thing might be and I'm not necessarily saying it's going to be a sell America. It could be or just buy less of America. And this is this is.

for a couple of reasons. Number one, Torsten Stock actually had a great chart today showing that foreigners own 18% of sort of the US stock market. And that's been trending up for decades.

And I think right now with both the tariffs and maybe sort of the Mag seven trade splintering. So it's not one homogeneous group. It's a couple of stocks that will work and some won't because that's where foreigners piled into that. I think this all together told foreigners like, oh, my 18% ownership of the US stock market is just way too much.

And we own too many U.S. assets as a piece of our pie. I mean, one thing to understand here, too, is with the dollar weakness, which could be part of foreigners either buying less U.S. stocks in terms of flows or outright selling. If you were a European investor this year that bought the S&P 500 and you did not hedge that position, you're down 9% this year. On the currency move. On the currency move. You're down 9%.

If you are a dollar investor who bought the German DAX, you're up 30%. So I think that, and when I say sell America, I'm not saying it's not a bear call in America. It's saying that foreigners got way too overloaded on U.S. assets and they want to own less. And by owning less, us market guys know that

Prices adjust on the margin and all you need is less flows into US markets. And that's a big change. But I do have to say from a business perspective, the tariff war was a big stiff arm to the rest of the world when it came when it comes to global trade.

And I've heard stories and there was a Bloomberg article this week where foreign exporters to the U.S., anecdotally, a few of them are saying are invoicing now in their own currency, where for many, many years it was an invoice in dollars and that U.S. importer just paid the dollars and the foreign exporter.

exporter, it was up to them to convert it to their local currency. Now that Italian exporter of food equipment to a US restaurant is saying, no, pay me in euros. You take the FX risk. I want euros up front. So my point is that there is a global rethink to the extent at which foreigners are

have been overexposed to us assets and they just want to diversify and that has negative implications for potentially us assets and the us dollar all right last question we're two minutes into the close this is wednesday afternoon markets closed tomorrow we're basically dead flat right here which is pretty fascinating you have a vix just above 20 you have an s p that's basically 59.80 we know that's uh 61.50 was that all-time high um in february we have the 10-year yield at

We have crude oil at about 75. We have gold very near 3400. Those prior all time highs, the Dixie we just said is just below 99. We're getting towards the end of the quarter here. All right, back half of the year, S&P up

you know, 2% right now or so. What do you think the return, let's just assume that we're gonna get this tax cut. Let's assume that the cuts are front end loaded. The spending is gonna come, you know, like come down sooner or later, but that's stimulative, right? Weak dollar, lower yield-ish, you know, that sort of thing. It's probably not a bad,

backdrop for stocks, right? And let's assume that tariffs don't get much worse than they are right now. Geopolitics settle down. What is your outlook for the back half of the year for the S&P 500? So the issue that the S&P 500 has is sort of the flip side to the concentration. When all seven, all top 10 stocks in the S&P were working, that concentration was enough to drive the bus.

Now, the flip side of that concentration coin is if you start to lose the leadership of some of those names, it gets harder to power that index. Now, there can be plenty of other stocks within the S&P that work, but they're not a big enough percentage to drive the S&P bus.

So while we can find a basket of stocks that are going to do just fine this year, the S&P 500 as an index, because it's losing its leadership in terms of a group, it's going to be much harder for the S&P to outperform many of its components and many other parts of the global stock market.

Peter Bukvar of the soon to be name changed Bleakley Advisor Group, the CIO. You are the man. We'd love having you on. Your time is precious, but we love having you share it with us. Thanks, Peter. Thank you guys. Same here. Thanks, Pete.