'Central Banks Are No Longer Our Friend': Why The Bond Market Took Control

Jeremy Saffron

Gold is off 10-12% from highs above $5,000, despite inflation surging and oil spiking. Real incomes have fallen for three months. Asks if the gold bull case is still intact.

Peter Boockvar

Gold's pullback is a digestion/consolidation after a dramatic rise. Higher real rates and a strong dollar are headwinds. Gold and US Treasuries have been a source of funds for energy-importing countries needing liquidity.

Jeremy Saffron

PCE inflation at 3.8% YoY, core PCE at 3.3%. Real disposable income fell for the third consecutive month. Savings rate dropped to 2.6%. Q1 GDP revised down to 1.6%. Asks what type of inflation this is.

Peter Boockvar

Inflation is a combination of excessive fiscal spending monetized by the central bank and major supply disruptions from higher energy/commodity prices. The average consumer doesn't care about the textbook definition, only that costs are rising.

Jeremy Saffron

Real spending up only 0.1% while income is shrinking. Is this late-cycle pressure or the consumer absorbing another inflation hit?

Peter Boockvar

Companies don't immediately raise prices after a supply shock; it takes 2-3 months for higher raw material costs to flow through. This process will continue to unfold unless oil/commodity prices decline sharply.

Jeremy Saffron

Asks if the economy is slowing fast enough to bring inflation down on its own.

Peter Boockvar

It's a two-speed economy. The data center buildout is seeing prices go up across the board (steel, copper, memory). Other parts (housing, consumer) are under pressure. Walmart noted the average customer is buying less than 10 gallons of gas for the first time since 2022, signaling demand destruction.

Jeremy Saffron

Discusses the Fed: Kevin Warsh is day 6 on the job. Trump wants rate cuts, but Waller and Barr publicly pushed back. Asks if that was a coincidence.

Peter Boockvar

Warsh's colleagues are planting their flags to establish their opinions and protect their reputations given the reacceleration of inflation. Warsh is uniquely qualified but subject to macro circumstances.

Jeremy Saffron

Asks about Warsh shrinking the Fed's balance sheet (currently above $6 trillion) as a primary tool.

Peter Boockvar

Warsh wants to reduce the Fed's footprint. The risk is the transmission mechanism through financial markets. If he tries to clip another trillion and the S&P drops 25%, will he be so bold? He will be more judicious.

Jeremy Saffron

$120 billion flowed into money market funds this month. Repo rates are below the Fed's target range. Does this liquidity boom complicate the tightening story?

Peter Boockvar

Money moving to money markets is a search for yield. The rise in short-end bond yields makes money markets more attractive. Regulatory changes (SLR eased) give banks more liquidity, potentially giving Warsh license to shrink the balance sheet.

Jeremy Saffron

Asks about gold's changing role in the global monetary system beyond just price.

Peter Boockvar

The growing market share of the Chinese Yuan in global transactions (from 3% to 8%), particularly in commodities, is reducing the petrodollar's dominance. Gold is becoming a neutral settlement asset, especially for countries that can't transact in dollars.

Jeremy Saffron

Foreign Treasury holdings have fallen from 50% to 30% of the market. Is that capital going into gold?

Peter Boockvar

Yes, it's going into gold and other commodities. Other heavily foreign-owned bond markets (UK, France, Germany) are also under pressure, highlighting that governments can't assume foreigners will buy their bonds.

Jeremy Saffron

What would tell you the gold thesis is wrong?

Peter Boockvar

If Warsh turns out to be a super-hawk, dramatically cuts the balance sheet or raises rates, causing a dollar rally. Or if the US government gets fiscal religion and the deficit drops to 3% of GDP. But it's hard for Warsh to get too hawkish without causing a recession.

Jeremy Saffron

Asks about silver. Boockvar trimmed earlier this year. Where does it stand now?

Peter Boockvar

Trimmed almost all silver in the vertical move. Wants to get back in because the supply-demand deficit is intact. Waiting for the technical setup to join the positive fundamental setup after the correction.

Jeremy Saffron

Describes the K-shaped economy: top is AI infrastructure, bottom is manufacturing/housing. Disposable income down 3 months, savings rate 2.6%, CEO confidence at 47. What doesn't the market care about?

Peter Boockvar

The market doesn't care about the divergence. It loves the AI/data center buildout. Half the S&P touches AI in some fashion; 18% is semiconductors. The bet has to pay off, but the level of spend will slow down eventually.

Jeremy Saffron

Fitch reported private credit default rates hit 6%, the highest ever recorded. How serious is that?

Peter Boockvar

Not serious yet, but the trajectory is worth noting. Private credit has to be more judicious with lending due to less inflows. This could raise the cost of capital for businesses getting direct loans.

Jeremy Saffron

AI buildout is showing up in inflation data. Computer software/accessory prices rose 5% in April. Asks why this matters.

Peter Boockvar

Higher component costs (memory, oil) are flowing through to retail. HP and Dell will raise prices. For decades we saw falling TV/PC/iPhone prices; that is over for now. Even Apple noted higher memory prices will be more pronounced.

Jeremy Saffron

CDW noted customers pulling forward memory orders on price fears. If the conflict ends and orders normalize, what does that do to the AI trade?

Peter Boockvar

There is a pull-forward throughout the economy, not just hardware. Companies are trying to get ahead of price increases and supply shortages. There is likely double and triple ordering. The recent rise in manufacturing PMIs is partly due to this pull-forward.

Jeremy Saffron

China is offering AI models at 75% below US pricing. What does the market understand about the competition?

Peter Boockvar

China is developing its own memory and semiconductor industry. For the first time since Japan in the 80s, US tech faces a formidable competitor. China has gone past the US in EVs, automation, and robotics, and has a cost advantage in electricity.

Jeremy Saffron

Short interest in consumer staples/healthcare/utilities is at multi-decade highs. Fund managers are most overweight equities since early 2022. Ultra-wealthy have sold over $1B in stock. Boockvar is buying staples. Asks him to make the case.

Peter Boockvar

Consumer staples are the most hated area of the market, but there is a potential inflection. If the war ends, relief on packaging (polyethylene) and aluminum prices will help companies like Coca-Cola, Pepsi, Kraft Heinz. They offer nice dividend yields and low valuations.

Jeremy Saffron

Asks about agriculture as the next leg of the commodity bull, specifically fertilizer (Mosaic).

Peter Boockvar

Ag is next. Nitrogen (urea) is blocked from the Strait. Sulfur/ammonia prices have surged, but phosphate prices haven't kept up, so producers are cutting back. Less fertilizer in the soil will lead to higher crop prices (corn, soybean, wheat) later this year.

Jeremy Saffron

What is the specific catalyst to take gold back through prior highs? Is there a yield level that works against gold?

Peter Boockvar

Wants to see the pace of central bank gold buying in Q2. Was gold a source of funds for some countries, or was it just talk? Also wants to see if the rise in real rates continues. When the war ends, does the dollar resume its downward trend?

Jeremy Saffron

If Q2 buying slows, does that break the gold thesis?

Peter Boockvar

Sees it as a temporary liquidity thing, not a fundamental break. Central banks are still buying. When the war ends and energy importers get relief, they will likely resume gold purchases.

Jeremy Saffron

Boockvar reduced his Japan equity position after years of being right. Is the thesis done?

Peter Boockvar

Not done, but started thinking about competition from China. Japanese and Chinese manufacturers are butting heads more. The market wasn't as expensive anymore, so it was time to trim. Thinks there could be a yen rally ahead if the BOJ raises rates in June.

Jeremy Saffron

What is the one thing markets have completely wrong right now?

Peter Boockvar

Complacency and nonchalance about the rise in long-term interest rates. If the 10-year goes back above 4.5% to 4.75%, people will wake up to the reality that interest rates and central banks are no longer our friend. There is risk of a sovereign bond issue.

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