Post-Election Market Implications with Peter Boockvar, Bleakley Financial Group

In this month’s episode, Peter Boockvar, Chief Investment Officer of Bleakley Financial Group, visits with Vin, Zach, and DCG’s Justin Bakst to discuss potential economic implications from the recent US Presidential election.  The four dive into the key policy areas Peter thinks will be most impactful over the next few years, expectations for our “two-lane highway” economic system, why the Fed should be taking the recent bond market activity seriously, and prospects for deregulation as it pertains to the banking industry. 

For more insights and ideas, visit DCG at DarlingConsulting.com or follow us on LinkedIn.

Transcript

On the Balance Sheet: S3 E11: Post Election Market Implications with Peter Boockvar, Bleakley Financial Group

Transcript

[Vinny, 00:06]

Welcome to On the Balance Sheet season 3 episode 11. Today is a terrific episode. We are going to be joined by Peter Boockvar. Peter is, I would say, the most renowned guest we have so to speak, he's the Chief Investment Officer at Bleakley Financial Group and, Zach, really excited for this one - very timely. Can you tell us a little bit more about Peter?

[Zach, 00:26]

Yes, absolutely and and we're definitely gonna talk today about the economy, post-election interest rate, just a lot of his thoughts on where we're going, you know, certainly from here. And so, as Vin mentioned, Peter is the Chief Investment Officer at Bleakley Financial Group. He's been there for over six years. You might notice him from his time on CNBC and other financial media outlets; he's on there all the time. He's a regular CNBC contributor. He also has his on his own sub stack, the book reports it's BOOCK report, which is a tremendous read for any any any folks who are wishing to know more about what's going on out there, his thoughts. And prior to that he was the chief market analyst for the Lindsey Group, which is a big macroeconomic market research firm founded by a former Federal Reserve governor. He was at Miller Tabak, he was at Omega advisor. So he's been around for a very long time, over 30 years, and we're just really excited to get his thoughts on what to be expecting in 2025 because I know that for most of you out there, you're in budget season and you're waiting to figure out what the great forecast is going to be, what volumes look like, and I think he has a lot of things to say here on what to be thinking about.

[Vinny, 01:31]

So, without further ado, Peter Boockvar.

[Zach, 01:36]

Welcome back to On the Balance Sheet. We are very excited and fortunate to have a extra special guest with us today, Peter Boockvar, Chief Investment Officer from Blakeley Financial Group. Peter, how are you doing today?

[Peter, 01:49]

I'm doing great, thank you. Hope you guys as well.

[Zach, 01:51]

Thank you, and Justin, why don't you lead us off with the first question for Peter.

[Justin, 01:53]

So, let's start with the elephant in the room. Our clients, they're planning for 2025 and it's sure to look significantly different than 2024. And so, let's start with the US election. Really, regardless of your politics, this administration will look strikingly divergent on key issues around regulation, taxes, tariffs, even the role of government. Give us your thoughts and how it may impact our clients.

[Peter, 02:21]

Well, we'll take it one piece at a time. On the tax side, the one benefit that that Trump had in 2016 was there was a lot of sort of low hanging tax fruit for him to pull. It was an easy thing to do. I shouldn't say easy, but in terms of corporate income tax rate, that was way too high, to go from 35 to 21 was a really big deal. I don't think he's going to be able to to cut that rate again, so I think at best the corporate income tax rate stays the same. On the income tax side, we know that they expire at the end of 2025 and on that with sure some tweaks here and there and some negotiating here and there - at best tax rates stay the same. So, on the tax side, both individual and corporate, I think at best, the rates stay the same so we don't get that incremental benefit like we did in his first term. I think the real benefits will be on the regulatory side, certainly for certain industries like financials, healthcare, we will be uncertain about what kind of benefits we get. I don't necessarily think that much will change on the healthcare side since Medicare, Medicaid spending are obviously a huge budgetary item. Energy, I'm sure there'll be some help on the permitting side, maybe they'll open up some some public lands for drilling, but an oil company is only going to drill if the price is right. So, I think that an easier regulatory touch, I think, is well where you'll see most of the benefit. On the tariff side, you know that's the big open-ended question in my opinion and whether it's going to be targeted to specific industries or is it going to be sort of a scatter shot approach of anybody who's going to export to the US are going to have to deal with the tariff. I don't think the market is going to take too well to a scattershot approach, I think they'll absorb, and they'll manage something that is very selective. But you know there is there is no world of free lunches, and even if they are more targeted, you still have unintended consequences. We saw in 2018 with the tariffs manufacturing sector, when it's a recession. If you look at industrial production, the manufacturing component, it peaked in the middle of 2018 just as the tariff battle got underway. So, I do think we have to sort of be careful with it and follow sort of the the the chain of of impact. For example, we raised tariffs on steel and aluminum, we wanted to protect the US steel and aluminum industries, which I can understand on paper why you want to do that. But then of course you don't quantify the negative impact of all the users of steel and aluminum and the jumps in their costs in terms of how that flow through finished products. So again, no free lunches with this, but we'll see. I think one other thing in terms of the markets is, and Trump had the benefit in 2016 of inflation was low, interest rates were low, the Fed had only just begun to raise interest rates, but also very low level whereas here we have much higher interest rates both in the short end and the long end. We've gone through a major inflationary time period. So, the first week of the election, the market responded, they took up their 2016 playbook. I just think this time the playbook is going to run a bit differently.

[Zach, 05:29]

Peter, thanks so much for that overview and just kind of thinking from our perspective, a lot of our listeners here are our bankers, you know community, regional bankers, and I think the regulation piece, they'd be very interested in as well as, you know, your thoughts on the term structure of interest rates and the inflation piece of that, too, like will we we're finally not inverted anymore. But what are your thoughts on the 10-year, the Fed funds, just kind of give us some of your feedback there?

[Peter, 05:55]

Well, the Fed Fund is is interesting because, you know, I mentioned the market participants taking out the previous playbook and I think they did that this time around as well. It's no coincidence that the stock market bottomed in October 2022, just as the Fed was about to slow the pace of the rate increases. The market sort of said, OK, we've reached maximum interest rate increase pain in terms of the number of hikes at one particular meeting. Then they started to look at to when the Fed was going to eventually stop raising rates and then eventually start to cut rates. So, I think we've been rallying for basically two years now sort of around that, but now when going into the feds cutting a 50 basis points and soon after we got way too ahead of our skis in terms of the extent of which that March was pricing in rate cuts. And now we've already taken back because things have changed since that September, and we've already taken back 100 basis points -ish of those rate cuts. I think the Fed was sort of run over and with the long end of the curve and with the 10-year jumping as much as it did. Now granted the long end fell going into that September meeting, but to get back to north of 430, and I used that as a sort of a a line because it's the 50% retracement of the 5% ten year last year and the 360 level that we saw the day before that 50 basis point cut. So that is something that I think is the market sort of speaking up and yes, we can analyze all we want, US growth and inflation statistics and we can think that, and I believe that US debts and deficits really matter this time around, but it's also a global phenomenon this rise in interest rates. The Japanese 40-year yield and the reason why I look at the 40 year is because it's the furthest along the curve from the sort of artificially set overnight rate of plus .25. So, to me, the 40 year Japanese yield is the part of the curve that is most market influenced and that yield is at the highest level I think since since 2008 actually charted. To chart it pre-2000, I couldn't even find it so maybe it was back then that they first initiated this Japanese bond that far out. So, this is a global phenomenon and you can actually chart the term in 10-year bond over the US 10-year GDP over the US 10-year and we're all in this bond boat together. We were in the the the bond bubble together when we had $18 trillion with negative yielding securities in Europe and Japan, but that influenced forward into the US Treasury market and now we're seeing the reverse of that. And I think this bond bear market continues on, it'll be in fits and starts and we'll get some rallies with sellers. But I do think that, at least on the longer end of the curve, that yields will continue to creep higher. And, you know, in in the mid-80s, people were whining about debts and deficits and it never mattered, and but I do think now it matters because we're much more reliant on US domestic buying and less so foreign buying. And if so many people are actually talking about it, that it matters, that means that people think it matters. And that also implies that, OK, if people think it matters, then they're more inclined to be buying short duration treasuries rather than longer duration treasuries.

[Vinny, 09:05]

Peter, this is Vinny Clevenger. Thanks so much again for joining us. I guess your last comments might be a segue for my question, which was I'm really curious and I get this from time to time from bankers that we meet with around the country kind of, hey Vin, when is the margin call on U.S. debt? And you know there's been so much made, especially more recently with the backup and rates about our deficits and our level of debt. I had read some of your prior commentary regarding there's probably 2 things you thought that may cause that and I was kind of curious if you if you'd be willing to elaborate on it. One would be the dollar tanking and two would be a 6 percent, 10-year treasury rate. Would you care to share a little bit of your thoughts to that being and I hope I quoted you right, too.

[Peter, 09:43]

It well, I was pointing to a 6% treasury in terms of what would be the level in yield that would get Congress to finally pay attention. So that's where you're at the 6%, not necessarily that I think, OK, we're going to go straight to 6% it was only in what we get Washington to to care and it would only be in a crisis if you get an actual response and a 6% to me would be a sort of a crisis level 10-year in terms of its impact on our interest expense, so that was that that level. So, for a while you think, OK, where is the which part of the market is going to sort of reflect the frustration and in terms of buying U.S. Treasuries in light of the deteriorating finances of the US government. And for a while I said OK, yeah, well simplistically thinking, it would probably be failed auction and just treasury yields would back up and that's where the reflection would be. And then I thought, well, maybe it'll be the dollar instead, that maybe it'll be just weakness in the dollar, but the dollar has sort of easy competition in terms of the yen, the euro, and the pound, and so on. And then I thought, OK, well, maybe it is a weaker dollar, but the weaker dollar against gold. And I think that's what we've seen so far, that's to me the first real expression of a problem with U.S. debt and deficits in terms of the markets perception of it. And that goal that, you know, notwithstanding the little pullback it had after the election, still $2600 relative to the to the value of the dollar. To me that's where it has been expressed, because foreigners are saying we want to own less dollars in our reserve pie, we want to own less dollars slices. And that meant that's meant going from call it low 60% percentage ownership of U.S. dollars in your reserve basket to high 50s, now that may not seem like much of a big change, but you go from 62 to 58%, that is a big change when you're talking about the amount of dollars that are involved here. And that I think has leaked into the price of gold and we've seen massive central bank buying as we know, part of it triggered certainly in large part by the US and EU freezing half of Russia's Central bank reserves, but it also is China that is buying oil from Saudi Arabia not using dollars, using their own currency and buying oil from Russia and using their own currency in India, buying oil in their own currency and just while the dollar will still be, the reserve currency will still be the dominant transactional source of funds on the margin, it seems to be that some countries plan on using less of it and that means they're also recycling less dollars into the US treasury market as well. So, I think it's it's a combination of these things was I guess the point I was trying to make.

[Vinny, 12:37]

Fair to say that that's a trend you would expect to continue, I mean, what would what would change that?

[Peter, 12:43]

No, I I I do see it continuing. You know, one thing I am going to be paying attention to when we look out, you know, call it a year from now, we're going to be debating and discussing who's going to replace Jay Powell? And is it going to be, you know, an easy money person because Trump likes low interest rates? Or is it going to be sort of a Kevin Moorish harder money person that is going to preside over the Fed? And I think Kevin Moorish would actually be a great addition to the Fed because that he is a hard more of a hard money guy who who understands the limitations of the Fed, and knows that they've gone way over their skis in terms of their activism. But you know, that can mean that can actually be sort of dollar bullish, maybe that maybe that's the time when I need to sell my gold if he becomes the Fed Chair. So that's just something I'm thinking about for someone who's, you know, been an Orange Bowl on on gold for a long time just something that I'm thinking about, but till then I don't see anything that changes this. I don't think that we we should only hope that there's more efficiency in government that must can that want to to sort of bring to the table, but at the end of the day it still has to be Congress that passes their recommendations. And with so many entrenched constituencies, I I don't know where we're going to get sort of much meat off that, that government spending bond, and also 70 plus percent of government spending is is non discretionary. So we'll have to see how that goes. You know, government efficiency is an oxymoron and so we'll have to see.

[Zach, 14:21]

Peter, I think it's a really interesting point on the Fed governor, or the the president's side of it, I'll just think it through some of your other answers to Vin’s question and some of that, I kind of hear was bear steepening cut of the curve and from a bankers perspective, where most don't want to see, you know, something like that, they much prefer go and bull steepen. So, let's just say maybe in that base case where the the Treasury, you know, maybe 10-year gets up to that 5% range, do you see the Fed continuing to cut? Obviously, 1000 other variables in play and then if you don't see them continuing to cut much more, what type of variables or what type of story do you think could happen where they would cut a time, like what type of things should people be thinking about if if they were to really start cutting, like what are the, what are the forces that might be pushing that?

[Peter, 15:06]

So, this is what makes sort of this time around a much different rate cutting cycle. Now, historically, as we know, that's cutting interest rates when there's a recession and or the financial crisis whatever and they slash and burn interest rates I think that this move in the bond market in the face of their 50 basis point rate cuts obviously then followed up again, I think was very noteworthy and that just maybe the Fed is not going to have the same flexibility to react to things that come our way because of with this sort of post inflationary environment that we're in that maybe inflation rates while they certainly are decelerating, don't stay down and they stress to call back 3 to 4% on a sustainable basis, which is quite different than 1 to 2%. One thing of interest in the Last Powell press conference was he was asked about what do you think about this move in in, in long rates in response to your cut on short rates? And he was rather dismissive of it. Oh, yeah well, the 10-year, you know, was a 5% last year, but it didn't stay there. It's almost like sort of po-pooing this moving long rate, and I think that was a big mistake. Now, the word gold didn't pop up in that press conference, which it should have, but I think that being not taking the markets message or sort of ignoring it or playing it down, telling me that they're probably going to make another mistake with focusing on them being quote on quote restrictive, even though that's a very nuanced word right now because they're restrictive for some parts of the economy, f you're a small medium sized business that's paying 9 to 10% interest on your loans or if you're in commercial real estate, yes they're restrictive, but as we saw the Fed tried to help all the real estate people and the real estate people got no help because rates went up and set it down after they cut. And on the other hand, with tight credit spreads, a record high in the stock market that's trading at the second highest multiple compared relative to March 2000 going back 25 years, there's certainly nothing restricting the animal spirits of the market. So to your question, because they keep using the word restrictive tells me that they will be focusing on cutting interest rates, hat's their bias still. But there's a lot of risks now involved that if they don't take heed to the jump in inflation expectations after they cut, if they don't take heed to this move in the long end, then they're going to get themselves into trouble again if they don't listen to the market's response to what they're doing.

[Justin, 17:45]

Hi, Peter, it's Justin again. You briefly hit upon this risk to small- and medium-sized businesses, and this isn't something that I hear too many in the mainstream media talking about - the the impact on high cost of capital to these folks. These businesses are are many of our clients’ customers, so could you provide us a little bit of additional color of the types of industries you see most impacted and how you see this and may play out the next few years.

[Peter, 18:14]

Sure. Well, the 9 to 10%, we just have to look at the NFIB, the National Federation of Independent businesses, their monthly survey and one of the questions is, what's the average loan that you pay? I'm sorry, what's the average interest rate you pay on a loan? And for September, it was 10.1%, which, I think, the highest in decades and the refresh one in October was down a touch in 9 and change. So that that's a a pretty heavy interest rate to pay on a loan for small business that is also dealing with an economy that's very mixed. So, in terms of who that affects the most, well, it's not only going to affect an existing business that just happens to have - call it a revolving line of credit that they're always tapped based on the seasonality of their business. If you're a retail store that needs to bring in a lot of product ahead of the holidays, and you're you tap your bank on your revolving loan, call it, in September, October to stock your shelves for November, December while you're paying much more for that loan and you're going to have, you know, less profit margin as a result. Or if you're looking to expand your factory floor and you need to buy machinery that's going to cost you more and what's not discussed is what happens if you are a new business that needs to borrow money to get off the ground. If you were a restaurant well, not only you're putting down a personal guarantee, but you probably have to raise more equity because of that high interest rate on the debt side, so you need to tap your family and friends for more money. So instead of saying call your to equity ratio being maybe 80/20, 70/30, maybe needs to be 60/40, 50/50 because that 9 to 10% interest rate you got to pay each into a lot of your free cash flow. Now of course, there are bigger companies that have access to the public markets, they have a lot more financial flexibility. So, I referred to the US economy as this two-lane highway. You have the fast lane, and you have the slow lane. And yes, you have bigger companies in the fast lane, but it's also, you know, much more differentiated, too, where you have higher income consumers in the fast lane, you have low- to middle-income consumers in the slow lane, you have those that own assets like homes and that you know the average price of the home has gone up 50% over the past four years, and and those that own stocks versus those that don't and are renting instead. They're in the slow lane manufacturing in the slow lane, global trades in the slow lane, existing home sales in the slow lane. Anything related to AI capital spending in the fast lane, anything not related to AI capital spending in the slow lane, anything related to government spending whether it's healthcare, the Inflation Reduction Act, the Infrastructure Bill, the Chips Act, you're in the fast lane. So, it's this very strange, uneven economy that when people look at it in the aggregate, they say, OK, 2 ½ % growth, oh, everything's fine, oh, the consumer spending numbers are good, oh, consumers in great shape. Well, it all depends on who you're referring to, and I think the government spending numbers are really distorting GDP. And I go through countless earnings calls every quarter on stocks that we own and stocks we don't own just to get a a micro viewpoint of things, but also tries to gain as much macro information as I can. And at least from my perspective, because a lot of the companies I'm looking at is not are not dependent on government spending, that it feels like a 1 ½ % economy.  And, but then if you listen to the conference called New Course Deal or Marietta Materials, or Vulcan Materials, or again anything related to, you know, the building of EV battery factory in Kansas because of tax incentives that the IRS gave, well you'd think that business was great. So, it's important for people not to paint the economy in one broad brush because there's a lot of moving parts underneath.

[Vinny, 22:12]

Peter, Vinny again, sorry to over generalize here. I'm I'm just kind of for many of the financial institutions we work with, the the employment number is such a big deal because it's so directly correlated to the their credit performance within their, on their balance sheets. I'm curious what your thoughts are, what's really going on in the unemployment market, you see a number that's in the low fours, we've seen job numbers that have been up and down for disparate reasons. I'm kind of curious what your thoughts are and what your projections are for unemployment and jobs in our country moving forward.

[Peter, 22:43]

So, I'll answer that with the data and also anecdotally. Anecdotally listening to last quarterly conference call from ZIP recruiter, ZIP recruiter is certainly one of the the biggest, if not the biggest, online job search agency and also TriNet which is a small business sort of the outsourcer where where they'll handle your HR and your healthcare benefits and a lot of other things. And then the hard data, whether it's jobless claims or the monthly BLS and ADP reports and job openings, you know, job openings continue to shrink. If you look at continuing claims that's hovering around the highest level since November 2021, which implies that people that are on benefits are having a tougher time finding a new job. Zip recruiter, business down dramatically. TriNet talked about reduced the pace of hiring, but on the flip side, you look at the initial jobless claims data, which as they measure it, now I say as they measure it because, if I lose my job, I may go drive for Uber because I can make more money driving for Uber than that I could getting unemployment benefits. So, I may get fired, but I'm not going to show up on the claims data. But as measured for those that do, you know, claims are still very low and you listen to companies that are just reluctant to lay people off remembering the experience of of COVID, where it took so much and so long to get people to come back. So, it is sort of, you know, I talked earlier about the bifurcated economy, there's definitely bifurcated labor market where the pace of firings remains somewhat muted and the pace of hirings does as well.

[Justin, 24:19]

Peter, one of the reasons we were really excited to have you on the podcast is you haven't been afraid to go against the grain. You've gone against the grain in your bond market calls. One of the things we talk a lot about at DCG is Murphy's Law is that anything that can go wrong will go wrong, and I think you've given a lot of our clients, really, things to think about about what could go wrong and and higher-for-longer type environment. At the same time, you've talked about the financial sector, and I've heard you in past interviews talk about the positives you see in the financial sector. So maybe you can leave us with some of your outlook in in this area and and what you think about for both large banks and and mid size and smaller banks in this environment?

[Peter, 25:04]

Well, it would be really nice to have a less regulatory touch with when it comes to these financials. You know, let's take the commercial real estate market. There's definitely stress out there, particularly in office and their banks that have excessive exposure to real estate, but the regulators, too, have tapped a lot of these banks on the shoulder saying stop giving out new loans. Which, ironically, with interest rates where they are, now it's actually a really good time to be giving out a commercial real estate loan because you get a high rate and the the the buildings have already been marked to this new reality. So, you can actually, probably price a loan much better today than you did a couple of years ago. So maybe just less sort of suffocation on the ability for banks to run their business and banks that are sort of losing market share to the private credit space, maybe some of these banks can regain that with some more flexibility. You know, I guess that's the main thing. I'll also, in terms of the bigger banks and those that have, you know, the money centers that have investment banking divisions, well, Lena Khan leaving the FTC is probably the biggest blessing in M and A, a banker or M and A lawyer can possibly have, because now you have the possibility of a lot more deal flow. Maybe even you can restart the IPO window again since she sort of suffocated that as well because the DC companies were afraid to sell out to companies that were bigger than them because they were afraid that it would get rejected. So those are some of the things that I think maybe can loosen up with with the new administration.

[Zach, 26:41]

Peter, thank you so much for that answer and and all of them. We really appreciate your time today. Heartfelt thanks to our listeners, too, and we'll definitely be keeping an eye on you on CNBC, so thank you again for joining us today.

[Peter, 26:52]

Sounds good, I really appreciate being on. OK. Thank you, guys.

[Justin, 26:54]

Thanks Peter.

[Vinny, 26:57]

We're back here. I thought that was a terrific conversation with Peter. I gotta tell you, I thought, you know, my main take-away from that conversation today was when you think you have these sort of hypothesis in your head as to how some of the policies that have been promulgated out there and the influence it's going to have on the economy, in general. I think when you listen to Peter, you understand that there's so many different variables that are going to influence. Whether it's tariff taxes, regular deregulation, etcetera, it's not as cut and dry as you think, and so I think that's you got to be very mindful of that as you're listening to this. And at the end of the day, there is no, there's no clear path as to what we're exactly going to get, but I think Peter gives you a lot to think about.

[Justin, 27:42]

Yeah, and on that same vein, you know, there's no path, and in fact I think the path that he talked about where the 10 year could hit 5% might be a little bit different than what many people are talking about in their their ALCO committees. And so we we talk about rates down, we talk about rates up, and at the end of the day you can probably make a case for for both ways, and it goes back to those basics that that we always discuss is, you know, you really have to listen to your balance sheet and that just hearing his perspective and and how things could could play out in this administration and this yield curve provides, I think, a a lot for us to to think about and discuss and digest.

[Zach, 28:22]

Yeah, absolutely, and I, I I liked his last question or our last question - his last answer, which is just focusing a bit more on the positives. I know we're all cynical as grist managers looking for what could go could go wrong, but I just like the if there is some less deregulation, what that might mean for for bankers, right, in terms of being able to on on the growth side, whether it's the M and A side, you know the the lending area, it just seems like he was maybe, well, he's might might be a little more pessimistic on the on the rate curve and some of the bond bear market conditions that could, you know, continue to percolate here from that he was more a lot more positive on the regulatory side, which I think a lot of our listeners will be very happy to hear, too.

[Vinny, 29:01]

Absolutely so much food for thought in today's episode, so that's a wrap for this special episode with Peter Boockvar. Thank you for listening to On the Balance Sheet and, hopefully, you'll be joining us again for future episodes.

[Dana, 29:18]

On the Balance Sheet is a podcast produced by Darling Consulting Group (DCG). All views and opinions expressed by the hosts and guests are solely their own and may not represent those at DCG. All third parties are independent entities and are not affiliated with DCG. This podcast is intended for informational and educational purposes only and is not considered as advice. All views and its opinions expressed are based on the information available at the time and may have changed based on the current market and other conditions. For more information about DCG, please visit  www.com.darlingconsulting.com or e-mail us at info@darlingconsulting.com. Today's background music is provided by John Sid, the Coma- Media and can be found on pixabay.com.

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