Tariffs Drive Inflation Higher (Uncut) 04-18-2025

Bond Warning as Tariffs Drive Inflation Higher with Peter Boockvar

Even if they cut, people have to ask themselves, is that going to matter? Is that going to be helping us? It’ll help some. It’ll help those that borrow, so for plus. But what happens if long rates still are worried about inflation? And just as we saw after they were cutting 100 basis points and long rates went up, maybe that same thing happens.

And actually, that’s what I’m worried about. So just because the Fed cuts short-term interest rates doesn’t mean long-term interest rates fall, too. On this episode of the What the Finance podcast, I have the pleasure of welcoming on Peter Buchvar.

So Peter is a CNBC contributor, Chief Executive Officer of Bleakley Financial Group and editor of The Book Report. So Peter, thanks so much for coming on the podcast today. Thanks for having me today.

I’m probably looking forward to the conversation. There’s definitely a lot happening in the world at the moment that we’ll be able to touch on now, but I always like to start very broad. So what are you currently watching in markets? Well, I think everyone’s watching tariffs.

So I think that’s stating the obvious. And also what earnings are going to look like over the next, you know, four to eight weeks and what these companies have to say in terms of what they’re seeing on the ground, what the impact of tariffs are having and what that means for the visibility for the rest of the year, which I can’t imagine many companies are going to have any. So that’s what we’re all watching right now.

Yeah. And how are you seeing the tariffs? Because I know, you know, let’s be honest, it’s probably going to change by the time this interview goes up, but there was the blanket tariffs and now it’s really just seems to be China, which is the main target. So do you think that was the plan all along or is this what are you seeing with it? Well, this is not all tariffs that’s causing angst in the market.

And the angst really started at the late January when the Chinese DeepSea news came out and that changed the entire complexion of the Mag7 trade. In addition to, of course, you know, Tesla not necessarily being thrown in with some of the other hyperscalers, but, you know, having its own issues. So I think losing the Mag7 as a leadership group was really the main sort of chink in the armor here since these stocks made up about more than a third of the S&P 500.

And then, of course, you throw in the question of what happens with government spending, since government spending has been a major support to economic growth, corporate profits and corporate profit margins. And then, of course, throw tariffs all on top of this and you get this troubled mix where tariffs go, who the hell knows what their main focus is, seems to be their obsession with trade deficits, which to me is nonsensical, but also having the desire of reshoring manufacturing jobs to the US, which is laudable, but I don’t think realistic. We’ve been losing manufacturing jobs as a percent of the labor force since World War Two.

And tariffs is not the elixir that’s going to change that. OK, yeah, a lot to touch on there. And I think I’ve heard you call it sort of the three pillars that you were looking at, I guess.

I’m not sure if these were if this was the same thing. But yeah, it’s sort of the as you say, it’s that technology and the Mag7, it’s the tariffs as well as this government spending cuts, which are the three pillars that you heard about. That was really in reference to the three areas of that’s been lifting economic growth, that being upper income spending, government spending and anything related to the AI tech spend.

You know, I mentioned government spending that has the potential of slowing down its rate of increase. AI tech spend is still very robust, but the rate of change is slowing. And if the stock market keeps falling, you can be sure that upper income spending is going to slow down.

Yeah, guys, it’s all linked to one of those, each of those different things you mentioned before. But it makes a lot of sense. So do you see Doge actually having an impact? I know there’s sort of a lot of questions about, you know, I think recently they’re requesting even more spending, you know, record quarterly spending moving forward.

So do you think it will have an impact? Well, so far, instead of the one to two trillion that it was possible to get, we thought we might get. Now it’s only about 150 billion so far. So I applaud the administration’s attempt to cut wasteful spending, and any, you know, corruption that’s going on.

But the problem is, is that the spending hole has been dug so deep on non discretionary items that you can cut all the non all the discretionary stuff you want, and it’s still not going to make a dent. But I do think there’s going to be a general focus here on slowing the rate of government spending. And it’s something that the US needs.

I mean, a 7% budget deficit relative to GDP in an expansion is just out of control. And we see the debt clock every day out of control. But by slowing the pace of spending, because we’re not actually going to cut spending, which we’re talking about slowing the rate of increase, we need to do it.

But there’s short term negative economic consequences of that. Okay, and yeah, where do you do you see this sort of economy going into a bit of a recession, at least the US economy? The odds are certainly rising pretty dramatically, and the stock market resumes its decline, you can probably clinch it. I say that because the economy and the stock market are tied at the hip.

So on one hand, the stock market is pricing in its worries about growth, but the stock market falling itself can negatively impact growth because of the wealth effect and the influence it has not just on upper income spending, but CEO confidence. I mean, CEO confidence when they see the stock market fall, they say, Oh, I need to be careful here. And that can cause them to reevaluate capital spending plans.

Yeah, definitely. And I feel like this tariff talk could potentially have a COVID like effect where it seems like people are stopping spending currently, you know, they’re rethinking contracts, they’re rethinking M&A, they’re rethinking everything, because there’s so much uncertainty. But then once the certainty, so that could have an impact in, you know, who knows how long, but once there is certainty, it could have that opposite effect, where it’s just all this money that’s been on the sidelines is thrown into it.

Do you think that could happen as well as that may wishful thinking? No, I mean, I think there’s on one hand, you have people trying to rush goods to the US, and us trying to rush goods outside the US on on who can be tariffing us. But once this stops, and the tariffs are full on, you know, you’re essentially freezing global trade right now, because of the uncertainty, what comes of the negotiations on the reciprocal side, what that ends up looking like what happens with China, I mean, you’re literally freezing global trade. So yes, this is a COVID like self inflicted wound.

I guess the question is, do we have this emergence out of there? Or is it a continue? Yeah, does it continue? I guess that’s something that will happen from it. I mean, we’ll have one, hopefully know what the tariffs will be. You know, obviously, Trump can wake up and change that any moment.

So I guess you’re never really certain on this since considering that he likes to use them, but hopefully, we’ll get more clarity on what the playing field will look like globally. Yeah, and it sounds like this, this could affect, you know, mostly the mark seven, and I guess the higher valuation equities, is that sort of how you see the uncertainty unfolding, at least in the near term? Well, as we can see in the markets, so it’s not like it’s just affecting those seven stocks, it’s affecting everything. I do think that those stocks and other high flyers are the most vulnerable since they were the big winners, they had the most inflated valuations, and they’re seeing slowing growth from here.

Okay. And then I guess, do you see any winners out of this scenario? Or is it just everything goes down and then wait and see? Well, I think relatively speaking, international markets which started to outperform in January, and that continued up until just a few weeks ago, I do think with the weakness in the dollar, part of money flowing overseas, I think international markets are going to do much better than US markets. And I think that that is a potentially a multi-year trend.

Okay. So yeah, you could see sort of, I guess, a shift away from the US exceptionalism back to yeah, everyone’s repatriating their money back to their own stock markets, as well as the US investors looking into them as well. Well, I think people are seeing the US is not as exceptional as it seemed.

And the exceptional growth rates over the last couple of years was, yes, exceptional AI technology, but also it was fiscal largesse, which, as I said, was also a big lift that took us to the point where it was just unsustainable. Yeah, okay. Definitely.

And yeah, as you said, now they’re cutting back, we’re seeing the impacts on the economy. So what does this mean for Powell? It seems like he’s sort of got a pretty, pretty tough job. Do you think there’s going to be sort of higher inflation? I know a lot of people are talking about disinflation and potential deflation.

How are you seeing? Well, the first thing we’re going to see is higher inflation because of the tariffs flowing through. A company that I follow, Fastenal, which is a major distributor of products that go into the industrial manufacturing and markets. They had a conference call on Friday with earnings and they talked about raising prices three to 4% and it can go higher than that with the reciprocal tariffs if they kick in.

So the first thing you’re going to see is inflation and just a matter of who’s going to eat it. Is it going to be the consumer? Is it going to be the manufacturer? Who is it going to be? And well, at least Fastenal is telling us it’s going to be their customers, which is basically the manufacturing and industrial world. And we’ll see what extent they can pass it on to everybody else.

Yeah, and I think that’s the challenge sometimes. And then companies might have an understanding of this, I guess, their first order. So what they’re actually producing and selling on to other customers.

But if they have all these imports that go into it, then that’s where the challenge lies. How do you know what other providers are going to have? How are they going to increase the cost of those goods? And then that’s then going to go into your costs and then how are you going to provide that on? So it’s that uncertain chain. Yeah, I mean, we’ll hear more of that over the next couple of months with earnings and Q1 earnings and see to what extent companies have pricing power, to what extent they’re going to have to eat it via their margin.

And that’s going to be the key. And with respect to Powell, he’s watching this, too. He’s got obviously a very difficult job with a stagflationary type environment.

Eventually, growth is really going to roll over and prices could as well, but only after the price increase that we’re initially going to see. So they’re just going to wait and see, just as the rest of us are, to see how this all plays out. And they can’t really conduct policy anyway because they need clarity on the tariffs as well.

I mean, the last thing they want to be in a situation is cutting interest rates. And then a day later, Trump takes all the tariffs off. Then they’d be completely flatfooted.

So you know, we’re all driving in a windshield that is very cloudy and, you know, waiting for some clear out of this fog. Yes. You don’t think they’ll cut in the upcoming meeting? No, they’re not.

Because they don’t know anything. So why would they be cutting? So they need more information. And I think the June meeting will provide them with enough information that if they did want to cut, you know, that would be a first start.

But even if they cut, people have to ask themselves, is that going to matter? Is that going to be helping us? It’ll help some. It’ll help those that borrow. So for plus.

But what happens if long rates still are worried about inflation? And just as we saw after they were cutting 100 basis points, long rates went up. Maybe that same thing happens. And actually, that’s what I’m worried about.

So just because the Fed cuts short term interest rates doesn’t mean long term interest rates fall too. Yeah, I guess a lot of people have been thinking that maybe Trump and Bessons have been trying to force the Fed to cut to bring down the yields. But as you’re saying, that hasn’t really had an impact.

Well, unless Besson can all of a sudden control the long end, I’m not sure if he’s going to necessarily get what he wants. I guess the only way to that, well, the current way would be QE for the Fed to start buying into. Yeah, but maybe that doesn’t work either, because QE1 and QE2, with the purpose of lowering long term interest rates, interest rates actually went up, not down when they initiated QE.

Now, can they do yield curve control? We’re so far away from that, it’s not even worth discussing. Okay, when do you think that would be worth discussing? Because I guess the challenge is that people think that 10 year… It’ll happen if the 10 year yield goes to five and a half to six in a very short period of time. And they’re not stepping in a second before.

Yes, I guess similar to what we saw in the UK a few years ago, where it’s more the speed of that acceleration when they’ll have to jump in. Right, if it’s an uncontrollable move, because the dollar’s tanking, foreigners are fleeing and people are dumping US assets, that’s when the Fed would try to help stabilize. But that implies that it’ll be the firetruck that shows up to the fire, rather than anything that’s really preemptive.

Yeah, I think I heard a good analogy where you said, saying that Trump and Besson are trying to push the yields down is like saying that you start a fire and then you call the fire department to try and put it out. Well, that was the analogy that policy and uncertainty tank the markets, and then they showed up with a 90 day tariff pause, and then markets rallied, and claiming that you were a hero. Yeah, exactly.

But the market sometimes seems to believe it when it’s up 10% or something on the day. Yeah, but it’s still below where it was on the April 2nd close when he initially announced the reciprocal tariff. So until you get above that, the market’s clearly expressing concerns with all this.

Yeah. And what impact do you see this having, I guess, on the long term macroeconomic outlook? Do you see there being a sort of bifurcation or separation of the US with other allies globally, with China? Is this sort of the death of global trade? How are you seeing the bifurcation? Well, the death implies that it never comes back. I would like to say badly injured, because badly injured means you can heal at some point.

But I do think that this has repercussions that are going to last. There’s reputational damage that’s being done. You know, the whole world has.

And I’m not claiming that there aren’t countries that are not fair with how they put up barriers and tariffs and other, you know, what everyone likes to refer to as non-tariff barriers. I mean, certainly China has not been very fair with stealing our IP and among other things. But, you know, there’s a way of dealing with that.

There’s a way of negotiating that rather than the path being chosen. So I think that, you know, I keep going back to, you know, a small business that has to manage this. A small business that’s created their model over many years, relying on outside vendors to create a product that they can’t produce profitably here, but they then sell here, not just here, but all over the world.

And they just don’t have the resources or the ability and agility to quickly adjust. You know, if Trump came out and said, you have a year now granted in 2018, that could have been the message. But, you know, the belief was never that we were going to have 154 percent tariffs on incoming imports to the US from China.

That was on no one’s guess card. Yeah. Well, I think even with we saw that with Brexit, that that was probably not very well done, even with however many years of notice.

I think, yeah, it’s obviously less. It’s more certain, but then there is still the major challenges you see with it. Right.

Yeah. I mean, no one guessed that this was going to be the end result of tariffs and also, you know, this question of what the end game is, it’s becoming clear what the end game is. It’s to, you know, to believe that the US is going to vertically integrate all of its manufacturing and make everything from the nuts and bolts to the end product.

You know, that’s just not a realistic thing, but that is the goal. And also the belief that a trade deficit is bad, even though we have a huge trade surplus in services, somehow that is not perceived at all as part of it. So I think we’re working on a false premise that a trade deficit is bad.

Yes, we’d like to make more things here, but I think there are other ways of trying to encourage that, like lowering the corporate income tax rate even further, cutting regulations and easing permitting. There are so many other ways we could have gone about this instead of putting walls around the country. Yeah.

And it looks like they are trying. They do want to do those things. But then for some reason they see this as a revenue raising mechanism to then allow for tax cuts and other other factors.

Right. So you raise this tax and you lower that tax. There’s no change or higher taxes.

Yes. So even though it might sound good, it’s not really having the intended impact. Right.

That’s what it seems. Yeah. OK.

Interesting. And I guess there is the people who push back and say, well, the average person in the US has been sort of left behind. Maybe that’s true or not.

But I guess how else what other mechanisms could be used to sort of bring them along on the journey? Because there are many forgotten areas in the US and that’s sort of, I guess, a trend throughout the whole of the West as well. Well, manufacturing jobs as percent of total employment in the US has been declining since the end of World War II. So it didn’t all of a sudden decline when NAFTA was passed.

It didn’t all of a sudden start declining when China entered the WTO. You’re talking about, call it what, a 80 year depression of declines. A lot of it has to do with just the shift in spend.

It’s also technology and production efficiency and the shift. I mean, we I don’t know if the US would have been a better country if we were still still had people at sewing machines. I’m not sure if we’d be better off with that.

I think we probably weren’t when those that can make sewing machines or use sewing machines to make apparel. It’s probably better off being outside the US. But we’ve scaled up in so many other ways because the level of US exports, while unemployment has fallen, I’m sorry, manufacturing employment has fallen, US exports have skyrocketed.

So we’ve been able to still produce a lot more with less workers. But that’s you know, that’s the history of technology. I mean, you have tractors and combines that are laying seed onto a farm.

You don’t have people sticking their hand in a bag of seed and tossing it around. I don’t know if we want to go back to that. Yeah, no, definitely.

I know what you mean. Do you see a way for it to be resolved without, I guess these, as you said, may not go back to manufacturing jobs, but a way to resolve the current discrepancies around the world? I’m not sure. It all depends on what the definition of discrepancy is.

Yes, I guess it’s wealth divide or the opportunity divide, or I guess the divide between… The wealth inequality, the income inequality in the US, are there other drivers? I mean, the wealth inequality, I point my finger at the Fed. You know, the Fed has created this wealth inequality by years of zero interest rates and QE and central banks around the world have created a lot of these imbalances. But unfortunately, I don’t see enough fingers pointed at them.

Yeah, good point. So you think that this high interest rate is actually a beneficial thing for, I guess, if they’re held there for the long term for the average person? Well, interest rates where they are now historically is where they’ve been. It was the years of zero interest rates that was the abnormality.

The problem is going from the abnormality and trying to cure it within 18 months. You know, there’s a major transition phase that takes place because of all the debt that was priced pre-2022 reprices at much higher interest rates. But it’s the Fed that turned the US housing market upside down multiple times over the past 20 years.

So we have a major affordability problem in the US and that’s the Fed’s fault. And that creates a lot of societal problems when the cost of living is so high. That has nothing to do with our tariff policy and our trade deficits.

Yeah. What could they do to sort of reverse that? I guess it’s keeping interest rates higher, you know, continue to decrease the balance sheet. Well, I mean, that’s one of the problems.

It’s only time is the cure. It’s baby boomers that need to downsize and add more supply to the market. I mean, there are a variety of things.

But my point is, is that central bankers, particularly the Fed, are a lot to blame for the problems that people are blaming China for, for example. Yeah, it’s a great point. And what do you see happening with, I guess, gold and other commodities, are those things that you’re watching? So we’ve been very long and bullish, gold and silver in particular, and commodities generally, and, you know, oil and gas.

Well, oil prices have fallen a lot, but we still remain, think it’s pretty cheap and very bullish on natural gas and other commodities like fertilizers, uranium. I think commodities are going to be an area of outperformance in the markets in the coming years. And what’s the thinking behind that? Well, with gold and silver, you know, we’ve seen a tremendous central bank bid over the last couple of years.

Obviously, the recent weakness in the dollar has given gold and even another leg higher and gold has become the most important global reserve asset that investors want to own. And they’re going to own less U.S. assets. Gold is going to be also a part of that, you know, global reserve mix, less so than the mag seven, to use that as an example.

And I think silver is going to play catch up to gold. With fertilizer stocks, corn and soybean prices are depressed. And I think that in this sort of world that’s been split into pieces now, getting your hands on these commodities is pretty important.

So while the demand side may get hit by the slowdown in the global economy, I think low prices are going to really crimp the supply side. Yeah, definitely. That’s a great point.

So, Peter, thanks so much for coming on today. Really appreciate it. I was sort of touched on all parts of markets in the globe and macroeconomics and monetary policy.

But my last question is, what is one message you want people to take away from our conversation? The old playbook that worked so well of just buy Amazon and Apple and Google and everything will be fine. I think those days are over. The market is and the economy has obviously shifted to this new world.

And as an investor, you have to acknowledge that reality and invest appropriately. Perfect. Great message.

So thanks again. If anyone wanted to find out more about your work and what you do, where would the best places for that be? So my day job is CIO and Portfolio Manager at Bleakly Financial Group. And anybody can learn more about us at our website at bleakly.com. I also write a daily newsletter on Substack called The Book Report, and anybody interested can test it out.

Great. Perfect. I’ll put that in the description below.

But thanks again for your time. All right. Thanks for having me.

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