The Macroeconomic Guessing Game

schwartzfinal
Executive Vice President, Global Head of Research
09/10/2019

On last week’s episode of the “Behind the Markets” podcast, we were joined by two guests. The first: Peter Boockvar, the chief investment officer and portfolio manager for Bleakley Advisory Group, a $4.5 billion wealth management firm. He is also the editor of “The Boock Report,” a macroeconomic and market newsletter.

 

The second guest was Jim Bianco, president and CEO of Bianco Research, which provides wide-ranging commentaries on monetary policy, the intersection of financial markets and politics, the role of government in the economy, fund flows and positioning in financial markets.

 

Our conversation was broad, touching on the Federal Reserve (Fed), European Central Bank (ECB), the challenges of negative interest rates for Europe and Japan, and a bullish outlook for gold and silver. We also discussed the potential end of the bond bull market and the possibility that we may be nearing the end of the growth-led equity market rally.

 

Thoughts on the Fed

 

  • Bianco said that the inversion of the curve is a market signal that the Fed is too tight and has to lower rates. He added that the Fed will move too slowly in its cuts to bring rates down.
  • He also noted this is the first time in 40 years that the Federal Funds Rate at 2% is the highest policy rate in the developed world. It is the only interest rate of any tenor still above 2%.
  • Boockvar is worried that another Fed cutting cycle “drags us into the mud” of near-zero rates as in Europe and Japan, which would impede our banks. Boockvar would prefer to not lower rates dramatically. Rather, he said the ECB should raise rates out of negative territory.
  • Boockvar also sees cutting rates to be partially self-fulfilling by affecting consumer confidence because consumers believe it’s a negative signal when central banks lower rates.

 

The Endgame for Fed Policy and Yield?

 

If central banks decide they cannot go any more negative with interest rates, Boockvar believes we are likely to see a sharp move higher in rates.

 

Boockvar noted the spike higher in interest rates last week may foreshadow a continued spike in rates in the near future. The 2015 move in yields saw German 10-year bunds go from 7 basis points to over 1% in just two months, and he would not see any adjustment higher to occur slowly.

 

It’s Not Time to Be a Hero

 

Boockvar is cautious on equities given higher valuations and keeps bond portfolios at very short duration levels.

 

Gold and Silver Bull

 

Boockvar sees the gold rally as the new phase of a bull market. Because fundamentals are stronger than they were during the 1970s bull market, he ultimately expects that the rally will have to surpass levels of past bull-market highs. Offline in Maine, Boockvar and I discussed levels as high as $2,500 being possible during this rally. Boockvar also likes silver and mentioned a potential $45 to $50 price level, which would be considerably higher than where we are today.

 

The Gold Carry Trade

 

Bianco pointed out that a challenge for gold over many millennia was that bonds provided income and were thus a good alternative to gold, which provides no income stream. With the large percentage of global bonds in negative-yield territory, gold provides a “positive carry trade” and is a strange but actual high-yield alternative at 0 yield when compared with German bunds or Japanese JGBs in negative territory.

 

Value Cycle Turning Point

 

Both Bianco and Boockvar discussed the traditional growth stocks being in late phases and that value is poised for a run higher. Boockvar was cautious on traditional value indexes that are heavy on financials and banks, which he considers a value trap, but he also pointed to many of the low-volatility global business franchises with multiples near 30 that are overextended.

 

This was an interesting conversation with two great macro thinkers. Please listen to the full episode below:

 

About the Contributor
schwartzfinal
Executive Vice President, Global Head of Research
Jeremy Schwartz has served as our Executive Vice President, Global Head of Research since November 2018 and leads WisdomTree’s investment strategy team in the construction of WisdomTree’s equity indexes, quantitative active strategies and multi-asset model portfolios. Mr. Schwartz joined WisdomTree in May 2005 as a Senior Analyst, adding to his responsibilities in February 2007 as Deputy Director of Research and thereafter, from October 2008 to October 2018, as Director of Research. Prior to joining WisdomTree, he was head research assistant for Professor Jeremy Siegel and helped with the research and writing of Stocks for the Long Run and The Future for Investors. Mr. Schwartz also is co-author of the Financial Analysts Journal paper, What Happened to the Original Stocks in the S&P 500? He received his B.S. in Economics from The Wharton School of the University of Pennsylvania and hosts the Wharton Business Radio program Behind the Markets on SiriusXM 132. Mr. Schwartz is also a member of the CFA Society of Philadelphia.