Gold price to double as Fed kicks off tightening and economy flatlines

kitco news special coverage of the new orleans investment conference is brought to you by uranium energy corp uranium royalty gold mining and gold royalty corp hello i'm michelle macquarie and this is kitco news coming to you from the new orleans investment conference now in its 47th consecutive year and joining me now is peter bookvar peter is the chief investment officer at bleakley advisory group an 8 billion dollar wealth management firm peter is also the editor of the book report very good to have you with us peter great to be here thank you peter paul tutor jones billionaire hedge fund manager the latest to sound the alarm on inflation sing and i quote it is probably the single biggest threat certainly to financial markets and to society just in general we also heard recently from long-time activist billionaire investor carl icahn saying the same thing that there will be a crisis the way we're going driven by inflation caused by the unprecedented money printing now you were here and in your presentation last year you said that inflation was inevitable your presentation was in fact entitled inflation is coming in june this year you gave one titled inflation is here so peter where are we now regarding inflation and the global macroeconomic picture so my presentation in new orleans this week is inflation is not transitory and i think that that is right now the most important thing in determining the direction of the economy and markets when looking at over the next couple years am i right that it's not transitory or am i going to be wrong and somehow this is all going to get cleared up and we'll be back to the pre-covet path of inflation i'm pretty confident that i'm going to be right and then inflation is going to remain more sticky and more sustainable than uh than those in the transitory can't believe how sticky and how sustainable and how consequential would that be so right the last cpi number on a headline basis rose 5.4 year over year and this is before capturing what is now happening in the apartment rental market which is 30 percent a cpi 40 of the core where rental prices have really accelerated this year that i think will now start to show up in cpi in the back half of this year and i don't know whether cpi is going to six percent or north of that but even when it comes down maybe next year the year after i don't expect a reversion back to pre-covered levels and i think that's what's most important here also when you analyze inflation it's not one or the other black or white up or down there are two components of inflation services and goods prices there's no such thing as transitory services inflation services inflation in the 20 years leading into covid has averaged about 2.8 percent a year it's goods that have been basically flat showing no price gains because that's a technology production efficiency and so on but now you're marrying goods price inflation on a cyclical basis plus back to trend on services inflation and i'll argue that it's going to go even faster than it's been and it's going to be a couple of years of of higher than inflation than people think and the bigger issue is that this is not just a kick go discussion or wall street discussion this has major mainstream implications the average person is feeling it in their wallet in pocketbook well when we say inflation we have groups that are talking about hyper inflation it looks as though the economy is heading in a stagflationary direction as we see global growth start to wind down or not be as strong as initially expected certainly according to the latest imf report how devastating though is the inflation of which you speak is it something that is manageable or is it sort of the end of the world triggering a doomsday scenario type of inflation as we're hearing in some of the other presentations here at this conference right now it's just the stagflationary situation that's slowing economic growth so the atlanta fed which has this gdp now mechanism where they throughout a quarter predict what it eventually could end up being two months ago they were predicting six percent gdp growth for the third quarter yesterday they lowered that to a half a percent now it had been falling gradually over the last couple months but their last read was up a half a percent so essentially they're saying if they're right the economy flatlines in the third quarter and that's all because of this inflation it's problems on the supply side where obviously factories are shutting down because they can't find enough parts but also the inflation is impacting consumer spending that most of or more than the uh when i say more personal spending is being eaten up by higher inflation so last friday we saw retail sales inflation is running faster than the growth in spending so real spending is actually falling so the two of those combined is why we're seeing this slow down in the economy to me that's the definition of stagflation right and now we have this energy crisis which is also exacerbating matters as well as to your point the supply chain crisis which is also going to inevitably if continue to increase the price of goods right so and not all of these factors are within the fed's control but what can the fed do about it is it too late or is there some kind of fed action that can salvage the situation at this point well the fed can't print more semiconductors sure yes they can't print more oil and gas but what monetary policy does instead of encouraging the supply side they're trying to push the demand side and we're seeing that we've seen that over the past couple of years this aggressive push to convince people to borrow money to buy a car go borrow money to buy a home and what they've done is is that they're they've pushed demand to such an extent sure with the help of fiscal policy right that now you have a problem with supply and you have the ultimate definition of inflation of too much money chasing too few goods but where we are right now in the scenario where inflation is proving to be not transitory what do you expect the fed to do so the fed initially will follow through with what they've told us they want to do on november 3rd they're going to announce that they are now going to initiate tapering now whether that starts november 15th december 1st december 15th i don't know but it's about to begin and if it was up to them they would carry that out over the next seven eight months without any market accidents which typically there's an accident in the markets tantrum to be excited yes uh and then they'll talk about raising interest rates but that's how far behind the curve the fed is is that you have the most intense inflationary pressure since the 1970s and the fed's going to go seven months of tapering and rates are still going to be at zero so not only that other central banks are tightening at the same time the bank of england may be raising interest rates in november we've seen interest rate hikes out of developed economies like russia and brazil we recently saw some monetary tightening in singapore we saw a rate hike out of south korea a few months ago the ecb has even cut back slightly on their qe so just as we saw in march of 2020 another round of global easing we are now on the cusp of global tightening and however glacial however slow that goes that's going to have major repercussions for both markets and the economy and uh and inflation depending on whether they can get ahead of this or not so what is the best way as an investor to now position oneself going forward so i always like to say that inflation valuations don't matter until they do you know it's okay paying whatever multiple you want when inflation is low when central banks are easy but once that begins to change once inflation is part of the equation once central banks start to tighten then valuations all of a sudden matter so i'd rather be in more valued parts of the market cheaper stocks whether it's international markets that are much cheaper than the u.s i'm still pretty bullish on commodities particularly energy and uranium very bullish on gold and silver and and i think that is a way of sort of maneuvering through this now they're going to be companies that are going to be okay in this environment those that have pricing power but those that are going to have margin squeezes because they're paying off for labor they're paying for other costs that they can pass on you know that's going to be a problem for those names and getting back to the valuation standpoint if all of a sudden p multiples contract because central banks are tightening in response to inflation you know that will obviously affect those companies that have the bigger pes am i hearing you say that the tech sector then is potentially in jeopardy or certain parts of the tech sector is likely to be the hardest hit here which which sector would you get out of first shall we say so from a business perspective yes apple to use them as an example they have now supply issues and getting enough parts to finish their phones so that's a direct impact but generally speaking i think more the risk to apple is are they going to see faster growth and what's their multiple going to be because in a contracting multiple world if apple's p e multiple goes from 30 to 20 without any change in their business that's a 33 decline in their stock now i'm not saying that's going to happen i'm just saying that a lot of these expensive stocks become more vulnerable in a tightening inflationary type of environment where pes contract rather than expand but do you see a big market crash do you see an across-the-board uh 10 drop well 10 percent is is kid gloves historically speaking usually we get a 10 correction every single year where this goes i don't know i don't want to say you know our clients are long we hope that doesn't happen but i have to be cognizant of the fact that when you look back since 2010 outside of covid outside of the wand evaluation in august 2015 every notable market correction coincided with the end of qe the tapering of qe or interest rate hikes so i'm not going to be delusional and think oh yeah the fed and other central banks aren't going to tighten and there's not going to be a problem okay so back to how we best position ourselves to deal with this problem you mentioned gold which despite all the economic fundamentals indicating that there should be a rally has been stubbornly resisting going past the 1800 level what's keeping gold back so for context you look at silver was up 42 last year gold was up about 25 percent i think what has inhibited those two perfect inflation hedges relative to all these other commodities that have gone through the roof is this knee-jerk reaction of okay rates are moving higher the fed's going to tighten the dollar has bounced let me sell gold and silver that said now that where the tapering is now here and people and also the belief that oh yeah transitory inflation yeah i believe that in fact bank america had a survey and investors and still about two-thirds of investors still think it's transitory well i think as the days go on and we see more numbers people are realizing you know it's not so temporary and that rates and gold can go up at the same time as well as long as inflation is going up at the same time because that means real rates are going to remain firmly negative so i'm hoping that what we've seen over the past month or two of the market pricing in the fed tightening is sort of the bottom in gold and silver gold and silver bottomed in december 2015 just as the fed started raising interest rates for the first time in seven years gold went up with interest rates in the 1970s the fed funds rate in the mid-2000s went from one to five and a quarter and gold doubled that now is the time for those two things to start to catch up to this whole inflation trade and everything else in the commodity space do you have an outlook for gold for the next year yes higher higher silver as well i want to get a little bit more specific than that peter if you and inflation adjust gold for it's 1980 high you can go to 2500 can overshoot the 3000 plus silver if you just look at a 60 times ratio can get back to its highs of 50 plus namely one asset that's down 50 from its record high i can't really think of many other than silver now this is your forecast with the environment as it is and we mentioned the idea of fiscal stimulus because dc somehow is not getting the picture that we are in a pretty precarious state when it comes to the fragility of the economy and we're expecting even further stimulus if the biden administration and the democrats have their way they still want to pass an infrastructure bill they still want to pass a reconciliation bill most likely some version of some bipartisan infrastructure bill will get passed which will either inject about 1.5 trillion best case or over 3 trillion into the economy what happens then so we already know before we even get to that round of fiscal spending that the fiscal spending that they put in place in march before that in december of multiple trillions contributed to the inflation picture that we're seeing now in terms of stimulating demand financed and monetized by the fed now this next round of spending on physical infrastructure and whatever social infrastructure they want to do is going to be spread out over five seven ten years so it's not necessarily going to be all coming in at once but getting back to the same point of just throwing so much money in and trying to stimulate things when there's not enough supply there's a problem i mean okay so we want to fill in potholes and roads and we want to repair a bridge or refurbish an airport well good luck finding the people to do that how long is it going to take to actually plan and permit for that and god knows what the cost of the materials are going to be so yes it's going to it's going to take some time yes you're throwing in a lot of money and yes it's going to just exaggerate this inflation story that we currently have but exaggerate to what end because in order to pay for the stimulus the buying administration wants to raise taxes both on corporations and on individuals so if you have the scenario where you have inflation at levels that we haven't seen in 40 years combined with even further stimulus on top of the unprecedented fiscal and monetary stimulus combined with this idea of a global corporate minimum tax rate which may happen combined with further regulation combined with further taxes and individuals paint that picture for me peter what does that look like then well you can just exaggerate the stagflationary situation where the economy is gonna slow because of these tax increases uh all this spending we're not gonna get any bang for the buck of note in fact the multiplier even on hard infrastructure is less than one so yeah it's just going to embed us ourselves further into a stagflationary environment that completely handcuffs the ability of the central bank to meet that or or sort of uh try to offset that and if anything they're just going to exaggerate it themselves so is there a top three trade moves that you can advise i really can't find anything more compelling than gold and silver itself and the miners the miners are very cheap they're not getting any respect a lot of the big ones are paying healthy dividends paying trading at very low multiples relative to cash flow when we think about the the good mining companies that have all in sustainable cost of 800 even 900 dollars and they can sell gold at 1800 and that's a pretty large profit margin that these companies haven't had in a while they're much better run and if i do if i am right on the price going higher uh while those costs may go up because they're feeling the same sort of cost pressures that everyone else is the price of goal will be going up much faster and those profit margins can expand even further but in this stagflationary environment do you see the industrial use of silver take a hit for example and how would that impact the demand for miners and for the physical metal itself well with silver going into solar panels going into batteries electric vehicles i think that the secular trend in that demand electronics and anything in tech is is pretty unstoppable does the chip supply shortage which is used in a lot of the same electronic devices that silver is used for impact the industrial demand for silver to such a degree that would impact your prognosis on buying silver and silver miners it could i mean half the demand for silver is industrial about um half of the rest is monetary and coins and the rest jewelry and and tableware so yeah it could have some effect but the action in silver doesn't necessarily trade off the industrial uses it really trades off gold real rates the dollar and you can you can just see that relationship over the past year so i think if gold gets going for the reasons i stated silver is going to follow gold one of the things that have potentially held gold back is digital gold bitcoin which uh hit an all-time high today do you see uh that continuing to take away from gold luster gold's lustre a little bit sentiment always follows price so yeah when bitcoin is going to new highs that will garner all the attention once gold starts going up that will then get some attention as well and i don't look at gold or bitcoin as an all or one or the other right they can they they can very much complement each other as a percent of total financial assets gold and bitcoin are minuscule there's room for them both and i think that the bulls on bitcoin are bullish for the same reasons that the bulls are in gold currently have yeah inflation money printing so on and so on so it doesn't necessarily have to be one of the other and i think that it's quite a thing to think that something that's been around for 13 years is going to replace something that has 5 000 years of history but having said that are you also bolstering your bitcoin position assuming you have one i don't have one okay i'm more interested in crypto generally and and where this technology is going than whether bitcoins at 65 000 or 55 000 or 20 000. i think the to me what's most exciting is is crypto generally and how it's shaking up the financial industry not where the price of bitcoin is going you have no exposure to bitcoin directly no and how do you then create exposure to the trend of crypto so we're looking at just sort of picks and shovels types of the areas of the business i don't own coin base but that can be an example of a stock that yeah maybe one day i'm gonna i want to own and and others that can benefit from not just picking the price of a coin because i i think crypto generally speaking is trying to shake up the world in ways of not just okay is bitcoin going up and down i mean there are plenty of assets with limited supply bitcoin's not really the only one outside of gold i mean a baseball card that was made in 1970 while they're not making any more of it but i'm not hearing that a a baseball card from 1970 is all of a sudden gonna replace gold they're all uh collectibles finite in nature where you can print any more of it all right well peter thank you so much for sharing your thoughts with us we know you have a presentation to get to so we appreciate you joining us here on kiko news thank you so much peter bookpo thank you for having me kitco news special coverage of the new orleans investment conference is brought to you by uranium energy corp uranium royalty gold mining and gold royalty corp [Music] you

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Published: Thu Oct 21 2021