Bond Crisis In 2026? Why Yields Will Surge Even As The Fed Cuts | Peter Boockvar
Summary
Start earning interest in gold: https://Monetary-Metals.com/Lin Peter Boockvar, CIO at OnePoint BFG Wealth Partners and author of …
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I don't think there's a bubble in everything. There's bubble in some things. Uh but I wouldn't call that in everything. Certainly not a bubble in in oil prices, uh with a barrel of oil at at $56. Uh I wouldn't call a bubble in small cap stocks. They've been left for dead. Bottom line is I think inflation volatility is here to stay. The bell's been ringing multiple times now uh on this AI tech trade and uh I think that bell is going to continue to ring next year. It's my pleasure to welcome back to the show Peter Bookvar. is CIO at onepoint bfg wealth partners and the author of the book report ww uh bookreport.com. So we'll talk about his views on uh the markets and the economy for 2026. Peter, it's been a while since you were on the show. Welcome back. Good to see you again. >> Thanks for having me, Dave. It's actually on Substack. >> Substack. Okay, check out Substack. Link down below. Well, Peter, it's been pretty much almost a year and a half since you were on the show. Time flies. Uh last time you're on in April 2024, you had said the 10-year Treasury yield was likely to retest, possibly break 5%. Uh we've reached that point a couple times, not quite yet. Are you still bearish on bonds? Let's start there. >> On long-term bonds, short-term bonds are going to be influenced by the the Fed rate cuts. Uh but long-term interest rates around the world have continued to trend higher. On the day we're taping this, the Japanese 10-year JGB yield closed at the highest level since 2006. Uh the German 10-year bon at a 9-month high. The 30-year just off a 14-year high. And I do think that um while we've seen uh some pullback in the 10 and 30-year yield in the US, they still remain very elevated relative to uh Fed rate cuts. The Fed, if you look back over the last two years, so to capture the action leading into the September 2024 rate cut and then continue on through 175 basis points of cuts, the 10-year yield in the US is down all of 10 basis points and the 30-year is is actually a little bit higher. So, it tells me that Fed, ECB, Bank of England, which is about to cut rates, uh they are becoming less influential on long-term interest rates. uh and the bare market in duration, long duration continues on. >> Does that mean you're bullish on risk assets? Then if you're bearish on long duration uh bonds, >> uh I'm bullish on some risk assets and not others. Uh if long-term interest rates continue to go higher, that's not going to be good for other risk assets. Um irrespective of what central bankers do on the short end. But uh positive again on some things and not on others. Well, let's just start with your capital allocation thesis for 2026 then. So, we started with bonds, uh risk assets, some good, some not, and like you said correctly, you know, long-term yields going up. Uh uh yeah, can't be great uh for for all risk assets. What do you like then? >> Uh similar to what I liked in 2025. uh the the interesting thing about 2025 is that in investors sort of sort of widened the aperture of their investment horizon. uh coming into the year the markets were dominated by you know the top seven eight names that we all know and the that that trade that mag seven plus one I had brokcom uh really splintered this year and while the group still performed pretty well uh it underperformed a lot of other parts of the market and particularly international stocks and um um precious metals and other commodities X energy and uh some small midcap parts of the market do uh I do think that the risks I think the AI tech trade is exhausting itself. I think the bell is ringing here and Oracle is the one that rang the bell not with their last quarter when the stock uh fell sharply but after the spike in the previous quarter in the stock uh and that come down uh that was the bell ringing when it gave back all of those gains and we've seen a subsequent um number of events like uh coreweave's earnings uh the Gemini 3 news out of Google that pe made people question uh the open AI ecosystem uh and and more and more questions about all this spend and uh and whether it's going to be worthwhile because the spend is quite extraordinary. And just today uh we're seeing news out of Oracle that uh their uh their deal with uh $10 billion deal with Owl Capital has has has fallen off. Uh, Blue Owl had been in talks with Oracle about funding a 1 gawatt facility for open AI in Michigan according to the FT, but plans fell through due to concerns about Oracle's rising debt levels. Now, a lot of companies are using debt to finance AI expansion. Oracle was not is just one of them. Do you see this problem persisting throughout the entire AI sector? Well, it was Blue Owl that decided not to do the deal and looks like Oracle is going to replace that financing from somebody else. So, it's not like the project is not getting done, but it does highlight that uh at least from the private credit standpoint of Blue Owl, uh that maybe they're putting some of these deals on sort of a a tighter standard and uh we'll have to see what repercussions that has in terms of the cost of capital and uh ability for these data center financings to take place going forward. Just on a micro level, whenever a company takes on more debt, it's more risky. But potentially the ROI on this debt, if they're using it to finance expansion and AI and other things, is so high that it almost doesn't matter. Is that the case for tech? Uh that remains to be seen. Uh and it's not just the debt, it's the lease obligations that is being created here. It is the higher depreciation expense that's going to be embedded in the earnings. So uh we we've basically with um the this AI data center buildout uh altered the business models of a lot of these companies the big hyperscalers from asset light highly cash generative businesses with high returns on equity to highly capital intensive businesses that are going to generate less cash flow at least for now and uh and and that obviously negatively impacts uh their growth rates earnings growth rates going forward. So, um I don't think you can analyze these companies and their stocks uh with the same lens as you did prior to uh all this spend beginning in the latter part of 2022 and into uh 2023. You mentioned quite a few assets in the beginning of the interview when I asked you about asset allocation, but the truth is Peter, it's not just tech stocks that have gone up. It's precious metals. Uh well, Bitcoin's down in the year, but relative to a year and a half ago, it's still up tremendously. And so people are talking about not just a tech bubble but an everything bubble. Jim and uh uh uh Peter but rather Peter uh so in that particular scenario what do we rotate capital too? Is there a safer place valuations wise? Well the bubble is is not is is in the capex spend part of AI. Um you know you you take precious metals are they a bubble? Well not really. when you look at over the last uh you know the the rise in central bank balance sheets the global rise in money supply um its percentage of total financial assets you know it's far from a bubble I mean you look at silver silver at $65 um while it's gone vertical here and and and it might be prudent to take a tiny bit off the table um it was $50 45 years ago so it's it's barely above where it was so that that that's not the hallmark mark of of a bubble. Um, so I don't I don't think there's a bubble in everything. There's a bubble in some things. Uh, but I wouldn't call that in everything. Certainly not a bubble in in oil prices uh with a barrel of oil at at $56. Uh, I wouldn't call a bubble in small cap stocks. They've been left for dead and international markets, which have done tremendously this year and I remain bullish on. You know, one year of outperformance doesn't qualify as a bubble. >> You already know why people hold gold. But it's because it's real money. But what if your gold could do more than just sit in a vault? Well, that's where our sponsor today, Monetary Metals, comes in. They offer a way for you to earn a yield on your gold paid in physical gold. Through their leasing marketplace, you can earn up to 4% yield per year in gold. Instead of paying storage fees, your gold actually works for you. And because that yield is paid in gold, not cash, your stack grows no matter what the dollar is doing. Thousands of clients already earn monthly interest in gold and silver through monetary medals. And the numbers just keep climbing. So don't just hold gold. Start earning real gold on your gold today. Go to monetary-medals.com/in link down below or scan the QR code here. Put your gold to work soon. If tariffs and fed pivots were major themes for 2025, what would be the major themes for the next year? Well, it's it's what happens of this Gen AI tech trade and not just from the stock market perspective because they still they dominate the indexes as we know but if there's any issues with the stock market that's going to spill over into upper income spending which is a key support for the US economy and if the data center uh facility buildout slows down for whatever reason now of course the projects that are in in process they'll they'll continue on but if there are any delays days because of power access or whatever if there are any cancellations if there's any slowdown you know that could have economic repercussions as well since the US economy has been highly reliant on the data center building uh and and and generating GDP growth since you're on last year inflation has slowly trickled up far beyond the Fed's 2% target let's talk about your outlook on inflation any updates to inflation you've argued it wouldn't just go down to 2% and magically just stay there uh and given all the developments since 2024. What's your outlook now? >> Well, I still believe that we're not going we may go to 2% from a rate of change standpoint for a period of time, but I don't think we sustainably stay there. You know, one of the main factors that could do that is the slowdown in rents since that dominates the CPI. But we're already sewing the seeds for a further acceleration in rents probably sometime in the back half of next year into 2027 because currently we're absorbing a lot of supply in 23 and 24 that is tempering uh rental growth. But because there's been a notable decline in new construction of multif family, we are will eventually see a reaceleration because there's been very healthy absorption when it comes to uh all this supply because it's been very expensive particularly for first-time buyers to purchase a home. So I expect inflation volatility and to my point as you mentioned that I made last year, I don't expect us to go to 2% and magically stay there. We may go to 2% temporarily but I expect a real acceleration thereafter. Uh bottom line is I think inflation volatility is here to stay. I think the tariffs while technically is a tax and therefore a one-time impact on inflation. I think because it is sort of distorting and mixing around global supply chains to higher cost uh places uh its impact is going to be multiple years and I do think we're embedding a higher cost structure for a lot of companies uh because of these tariffs. How does that impact the Fed's decision then, especially since um well, we would still undecided as to whether or not it's going to be uh Walsh or uh or or somebody else or Hasset taking over Jerome Powell next year. But the the the the fact of the matter is whoever takes Pal's place is probably going to be more dovish than Pow himself. But on the other hand, like you said, inflation continues to stay sticky and elevated and be a problem. So where does that leave the Fed's decision? Well, whoever the next Fed chair is, yes, they're going to be cutting rates, but you know, PAL has been cutting rates, too. Uh it's just a question of how far they take rates. And I think a lot will depend on not just inflation, but the flow through of the rate cuts uh into the dollar because if the dollar takes another leg down, that's going to be inflationary. And if long rates go up because that part of the curb is not happy with the Fed rate cuts, then that's just going to offset and dilute uh the Fed rate cuts. So, I do think that there's uh a marketplace that is going to speak up if they think the Fed has taken the Fed funds rate too far uh relative to the economic factors that are out there. I understand the concerns about a slowing labor market. I see it. There's no question there's been a slowdown in hiring uh but with inflation still remaining well above 2% both on an absolute basis and on a sustainable basis, uh the Fed still has to be very careful with what they do. Uh, and going back to tech stocks, which is more important for the margins, the long end of the curve or the short end? >> Um, well, if you're looking to buy a house, the long end, of course, is more important. If you're looking to finance long-term projects, uh, the long end is certainly more important. If you're a sofur plus borrower, well, then you're more focused on where the Fed funds rate. So, it really depends on where along the curve uh, do you borrow. But the point is is that for now uh central banks have sort of lost the ability to influence the whole yield curve. The ECB has cut their deposit rate by 200 basis points and that hasn't stopped the German 30-year bun to go to 14-year highs. Uh the BOJ is about to raise interest rates interest rates which I think is very noteworthy and also will be a major bond factor in 2026 because it may not just be one more hike. uh it could be a few more next year and we've seen that as I mentioned earlier seen in the long end of the uh the JGB yield curve. >> So what is the trigger for the AI selloff? At what point in the steepening the yield curve do we see margins really start to compress and maybe it's not a factor of yields impacting the margins. Maybe it's something else Peter. >> Well the trigger's already happened. I mean look look at the stock price of Oracle and again not just before the sell off on earnings. it started to sell off well before that as people looked at and analyzed the extent of which they are creating their obligations uh debt obligations lease obligations and heavily reliant on open AI. Then you had coreweave people are questioning now their business model. You had I mentioned the the Gemini 3 and people questioning the open AI uh model relative to the competition uh with China with their open- source models creating a huge competitor with US technology. So the bell's been ringing multiple times now uh on this AI tech trade and uh I think that bell is going to continue to ring next year. >> You mentioned Japan earlier in the interview. What do you make of the fact that the Japan JGB ten year is now at the highest level since basically the mid 2000s? H is this going to cause a ripple effect on markets? Is the Japanese unwind unwind of the Japanese carrier trade going to happen? >> Well, I do think it's a really big deal. The long end of the yield curve is essentially tightened for the BOJ. I mean, even with a a BOJ rate hike to 75 basis points, they continue to drag their feet relative to inflation, which is running 2 and a half to 3 and a half%. So, the bond market said, "Hey, BOJ, we're not going to wait around for you. Uh, we're just going to tighten for you." And with respect to the carrier trade, I don't know what's left of the carry trade. I don't know how it it it is terms of uh size. uh but I do know that JGB yields are becoming much more attractive for global investors particularly Japanese investors that are still very heavily invested outside the Japan uh particularly in the US Treasury market. So uh if that yield rise does continue uh there's no question it can have ripple effects globally in terms of fund flows. As an investor are you more enticed to invest internationally away from US domestic companies because of interest rate differentials happening worldwide? not necessarily interest rate differentials somewhat that but I I just find that in terms of of of a value seeking investor that I am I'm finding just more opportunities out there I also do think that the US dollar which has had a tough year this year will continue to weaken I will get help uh investing internationally because of that and on the emerging market bond side to your interest rate differential point I do think local currency emerging market bonds are really attractive both because of uh the interest rate differential and also the very high real rates that they provide uh but also play on a weaker dollar. >> What do you make of the national deficit? Uh1 to2 trillion dollars a year I believe is the depending on which source you're looking at is the number we're running on right now. At what point does the market realize this is a problem or maybe it's not a problem? >> Well, the market I believe already realizes it's a problem and that's why one of the factors and why long-term interest rates around the world are going up. uh they're going up at Japan, heavily indebted, going up in the UK, heavily indebted in the UK, in in Germany, which is now ramping up fiscal spending in France, in the US. I think debts and deficits now do matter and um uh it's being reflected in in elevated long-term interest rates. >> Since Trump was uh uh was in office, which is after our last discussion, any particular trends in demographics or changes in demographic trends that you think are important for monitoring? Well, that that's more of a longer term uh play in terms of how it well I should say a longer term thing on how it plays out. Uh birth rates in in the developed world is slowing dramatically. Uh it's the worst in South Korea uh where I think it's under one. Um and and yeah, over time that that is a major thing that we need to pay attention to. uh how to react to it now. It's it's it's you really can't but uh over the next 10 20 years uh it's definitely important to gauge in terms of how it's going to impact uh global growth rates. >> Yeah, fertility rate uh is below two in many developed countries. But what about the immigration rates coming down for let's just focus on the US. How's that going to impact the labor market going forward? We're speaking today on uh we're mid December and the unemployment rate that just came in which is a few months old 4.4% 4% the highest it's been since 2021 I believe. >> Yeah. It's going to affect the supply side of labor no doubt but um at least for a portion of these uh immigrants uh well it's more it's illegal because legal it's perfectly fine to still come here but illegal it's you know they were mostly working in leisure and hospitality construction you know key key areas that we need people in. Um but it's hard to draw a broad branch broad brush. I think overall uh labor force increase is probably probably a a quarter to a a third of a percent which is pretty lackluster. Uh so you're going to really need strong productivity growth uh to generate um anything close to 2% GDP growth which we may see. AI may help that, but uh we'll have to see how that plays out because um without that that labor force growth, uh you you need that productivity increase to really drive overall growth. >> Okay, let's move on to uh commodities and hard assets. Now, since you're on the show in mid 2024, the silver price is up 160% give or take. Gold's up 90% almost 100%. Are we still in the middle of a commodity super cycle if that's what's happening right now? Peter, >> uh I don't like to use the words super cycle. I just think it's it's a bull market that will continue. Uh I do think from a portfolio management standpoint when something goes vertical uh it's important to just respect that that it's maybe time to take some chips off the table which we've done over the last um call it month in gold and silver but still remain very long and very positive. uh but acknowledge that when when something gets uh extended, it may be time for a break just as any sprinter needs to take a deep breath. But uh generally speaking, we still think that there's more upside and and and we're still long these commodities. My favorite commodity for 2026 though is oil. I think at $56 a barrel for WTI, it's probably one of the cheapest assets in the world and uh finding it a very attractive place to invest right now. uh as a contrarian. >> Is that simply based on uh current price levels compared to historical price levels or are you bullish on demand and and uh bearish on supply? >> Uh I it's both. Um right now the consensus is that we're swimming in too much oil. Uh I think it's that is exaggerated. I think that there's uh down here in the mid-50s there's going to be a big supply response. I mean, US shale, half of US shale doesn't make money um in the low 50s uh or high 40s. So, uh you will shut down half of that industry if oil prices fall much further. And the Saudis aren't happy with mid-50s oil either. And uh uh nor is the rest of OPAC. So, I wouldn't be surprised if there's a supply response there as well. >> Okay. So, we talked about the AI uh trade, but uh the the stock market uh the big indices S&P and NASDAQ, well, NASDAQ in particular, but just even the S&P, there's a huge concentration risk out there. And if you're somebody who is maybe not actively investing or trading, it's difficult to avoid this concentration risk. Is is this basically 2026 a year of stock picking? Is that what we're suggesting here? >> Well, I I think 2025 was as well. Uh and and I do think that that continues into 2026 is yes. concentration risk. We know that the top uh 10 stocks in the S&P are 40% of the index and technology generally speaking is about that ratio. Uh so yes, I do think that there's an opportunity uh to to do well relative to the S&P by picking stocks that are not included in that group. Uh because that group I think that trade uh is sort of exhausting itself here. So given that you think inflation will stay sticky, uh the long end of the curve is continue is going to probably continue to go up if not stay sticky around current levels. Uh do we how do you compare cash versus real assets uh versus yields? >> Well, um you know the bond market is not very attractive, you know, as we talked about. Uh if you want to have some cash, cash is always nice because it's dry powder or an optionality. And while central banks have been cutting interest rates, you still get a yield of some sort. Uh it's not like you get paid nothing like we did when we had 15 years of zero rates here and we had negative rates overseas. So cash is always important to have uh particularly if the market's going to have any difficulties next year if the AI trade uh continues to to to sort of lose its its dominance. Um commodities I do think you know as we talked about I think is an attractive place. Um I would add a to that too. We own some of the fertilizer stocks as a beaten up group. Um, so I do think that uh similar trends of 2025 with with a bunch of things working around the world, I'm hopeful that that can continue next year. >> And if let's say we were to fast forward a year or two from now, what do you think are the biggest market risks that investors are discounting right now? Is it just AI or is it something else? >> No, AI. Yeah, it's definitely as we said. Uh I think if long rates continue to higher, that'll be an issue. And we're watching if this hiring rate slows down in the US and uh that starts to negatively impact the economy, the data center buildout slows. Um we we we've seen a huge amount of money pile into private credit and usually when when when too much money chases uh something that there's there's not enough good loans out there for all that cash. That's something that I'm watching as well. Uh so a combination of those factors I think uh should be on sort of the investing dashboard uh of people as we as we look to next year. >> Well, if you just take a look at my screen right now, the advanced retail sales is published by the St. Louis Fed is still near all-time highs. In fact, actually it is on all-time highs. So people are still spending money. Uh the year-on-year change is not slowing down. Uh if you just take a look, >> that's a nominal term. So as you know, inflation helps that number. >> I see. So it's not just So what you're saying it's not more volume of spending. It's it's it's really just prices going up. >> Well, the last couple of years it's been a lot of that's price. >> Okay. But do you think that uh the K-shaped recovery, the economy that people are talking about that the wealthy are going to continue driving spending and so even if the labor market deteriorates for the middle class, it doesn't really matter? Do you buy that narrative? >> Well, uh well, yes, there's a wealth effect for sure with the stock market, but that means that the stock market needs to to hold up. I if the AI trade drags it down, uh, then that upper income spend is going to be put into question. >> What needs to happen for, I guess, the affordability crisis that the Trump administration keeps talking about to be solved? Is it something to do with fiscal policy? Do we just need to see a natural equilibrium of stock prices go down and housing prices correct with it? Um, is there something the government can do to intervene? Well, I think if the Supreme Court upholds the prior the the lower court's ruling that the president's use of emergency powers to implement tariffs, if that has proved to be unconstitutional, uh then we'll see a major tax cut in a variety of different things. That would certainly help the affordability issue. Uh I think most of the pain with higher prices is in the shelter side and uh I I think lower home prices while it would you know negatively impact the equity of of existing home buyers or or home owners I should say uh would certainly help new home buyers uh because they're the ones that are filling the affordability squeeze the most. Well, now that we've uh basically had almost a year of data on what happened or has happened since tariffs were implemented post Trump, who can you assess to be the real winners or losers coming out of the trade war this year? >> Um, I can't find too many winners. Uh, I don't think that trade wars create winners. Um, and there are plenty of losers, I believe. >> Well, from an investment standpoint, uh, how does this impact trade? uh were were your trades going forward if you if you let's assume that this continues >> well if it continues I mean I I think investors need to you know pay attention a lot I mean to how companies have mitigated it larger companies are much more flexible and able to uh to to to absorb the tariffs either through their vendor negotiations or their ability to pass through price or yes a lot of times they have to absorb it too but because they're big and they have juicier profit margins they can it's really been small medium-sized companies that have been most damaged uh by the tariffs and that's why I'm hoping they get some relief and if they don't uh then that will negatively impact them. I mean if you look at hiring small business hiring really took a leg down beginning in April just when the tariffs really hit us. So uh I think that that is is noteworthy. >> Okay. Finally, uh anything that surprised you for 2025 that you weren't expecting investment wise and uh what can we learn from that? Um, I'm surprised that oil prices have fallen as much as they have. >> Um, not much else really has. Uh, I I not much not much. I mean, there's always something that surprises. No one has the the the the ultimate crystal ball and uh for sure, but um uh but it's a good question. Well, what one thing that surprised me initially and maybe some other people maybe not, but the DXY fell on liberation day on April uh April 1st and 2nd and you know it's pretty much stayed rangebound ever since. You would expect just looking at Trump's first term that the dollar would appreciate versus other currencies when tariffs are implemented. Why didn't it happen this time around? Well, yeah. On paper that was supposed to be the outcome, but I think you pissed off the whole world and everyone said, "Well, do I want to own as many US assets?" And if I do want to own uh the same amount of US assets, uh I'm going to hedge my exposure and we've seen a lot of foreign hedging uh of dollar exposure of on their their their US dollar assets. Uh so while they maintained and maybe even increase in certain areas uh US asset holdings uh they've dramatically increased the level of hedging. So you can actually see coming into April uh the the year prior there was a pretty good relationship between the the dollar index and the MAG7 trade. The MAG7 trade essentially became a reserve asset for foreigners. They piled on to the same trade as US domestic investors did. But after April, um the US stock market had a nice rebound off those lows, but the dollar still was stuck in the mud. And I think that is because a lot of the hedging that has taken place uh against owning US assets from a foreign perspective. >> Okay. Well, let's just take a look at that. Uh so we have here the DXY overlay with the NASDAQ and I just want to get your perspective here. in the past. Uh not a huge direct correlation, but you can just see the NASDAQ take off and here the blue line uh irrespective of the dollar just flatlining around here ever since April. And so this divergence between the dollar and the NASDAQ um you know can how can we explain that given what you've just said? >> Well, no, I just explained it. It it was buying US tech stocks but hedging uh that exposure rather than uh buying it on an unhedged basis. Uh and there's no doubt with the blue chart blue the blue line is that you know the AI tech trade got a second wind after both the deepseek news in late January and the tariff news in early April. But uh again heavy uh hedging uh that I think helps to explain uh that divergence post April. >> So what's your outlook for the DXY in 2026 especially given that the long yield long end of the yield curve is expected to stay high. I think if the Fed keeps on cutting interest rates and uh I think if this trade war continues on uh the dollar and if the AI tech trade softens and and global investors start to sell uh I think that's going to be negative for the US dollar. >> Excellent. All right. Thank you very much Peter. Appreciate your thoughts. Uh where can we follow you? I mentioned we have a you have a Substack the book report. Where else? >> So yeah, type in my name in Substack and uh they can check that out. I write daily on the macro and markets. And then on the wealthmanagement side, they can check out our website onepointbg.com to learn more about what we do. >> Okay. Thank you very much, Peter. Appreciate your thoughts. Happy New Year. Happy holidays and we'll see you again in 2026. >> Thanks so much. >> And thank you for watching. Don't forget to like, subscribe, follow Peter in the links down below.
Bond Crisis In 2026? Why Yields Will Surge Even As The Fed Cuts | Peter Boockvar
Summary
Start earning interest in gold: https://Monetary-Metals.com/Lin Peter Boockvar, CIO at OnePoint BFG Wealth Partners and author of …Transcript
I don't think there's a bubble in everything. There's bubble in some things. Uh but I wouldn't call that in everything. Certainly not a bubble in in oil prices, uh with a barrel of oil at at $56. Uh I wouldn't call a bubble in small cap stocks. They've been left for dead. Bottom line is I think inflation volatility is here to stay. The bell's been ringing multiple times now uh on this AI tech trade and uh I think that bell is going to continue to ring next year. It's my pleasure to welcome back to the show Peter Bookvar. is CIO at onepoint bfg wealth partners and the author of the book report ww uh bookreport.com. So we'll talk about his views on uh the markets and the economy for 2026. Peter, it's been a while since you were on the show. Welcome back. Good to see you again. >> Thanks for having me, Dave. It's actually on Substack. >> Substack. Okay, check out Substack. Link down below. Well, Peter, it's been pretty much almost a year and a half since you were on the show. Time flies. Uh last time you're on in April 2024, you had said the 10-year Treasury yield was likely to retest, possibly break 5%. Uh we've reached that point a couple times, not quite yet. Are you still bearish on bonds? Let's start there. >> On long-term bonds, short-term bonds are going to be influenced by the the Fed rate cuts. Uh but long-term interest rates around the world have continued to trend higher. On the day we're taping this, the Japanese 10-year JGB yield closed at the highest level since 2006. Uh the German 10-year bon at a 9-month high. The 30-year just off a 14-year high. And I do think that um while we've seen uh some pullback in the 10 and 30-year yield in the US, they still remain very elevated relative to uh Fed rate cuts. The Fed, if you look back over the last two years, so to capture the action leading into the September 2024 rate cut and then continue on through 175 basis points of cuts, the 10-year yield in the US is down all of 10 basis points and the 30-year is is actually a little bit higher. So, it tells me that Fed, ECB, Bank of England, which is about to cut rates, uh they are becoming less influential on long-term interest rates. uh and the bare market in duration, long duration continues on. >> Does that mean you're bullish on risk assets? Then if you're bearish on long duration uh bonds, >> uh I'm bullish on some risk assets and not others. Uh if long-term interest rates continue to go higher, that's not going to be good for other risk assets. Um irrespective of what central bankers do on the short end. But uh positive again on some things and not on others. Well, let's just start with your capital allocation thesis for 2026 then. So, we started with bonds, uh risk assets, some good, some not, and like you said correctly, you know, long-term yields going up. Uh uh yeah, can't be great uh for for all risk assets. What do you like then? >> Uh similar to what I liked in 2025. uh the the interesting thing about 2025 is that in investors sort of sort of widened the aperture of their investment horizon. uh coming into the year the markets were dominated by you know the top seven eight names that we all know and the that that trade that mag seven plus one I had brokcom uh really splintered this year and while the group still performed pretty well uh it underperformed a lot of other parts of the market and particularly international stocks and um um precious metals and other commodities X energy and uh some small midcap parts of the market do uh I do think that the risks I think the AI tech trade is exhausting itself. I think the bell is ringing here and Oracle is the one that rang the bell not with their last quarter when the stock uh fell sharply but after the spike in the previous quarter in the stock uh and that come down uh that was the bell ringing when it gave back all of those gains and we've seen a subsequent um number of events like uh coreweave's earnings uh the Gemini 3 news out of Google that pe made people question uh the open AI ecosystem uh and and more and more questions about all this spend and uh and whether it's going to be worthwhile because the spend is quite extraordinary. And just today uh we're seeing news out of Oracle that uh their uh their deal with uh $10 billion deal with Owl Capital has has has fallen off. Uh, Blue Owl had been in talks with Oracle about funding a 1 gawatt facility for open AI in Michigan according to the FT, but plans fell through due to concerns about Oracle's rising debt levels. Now, a lot of companies are using debt to finance AI expansion. Oracle was not is just one of them. Do you see this problem persisting throughout the entire AI sector? Well, it was Blue Owl that decided not to do the deal and looks like Oracle is going to replace that financing from somebody else. So, it's not like the project is not getting done, but it does highlight that uh at least from the private credit standpoint of Blue Owl, uh that maybe they're putting some of these deals on sort of a a tighter standard and uh we'll have to see what repercussions that has in terms of the cost of capital and uh ability for these data center financings to take place going forward. Just on a micro level, whenever a company takes on more debt, it's more risky. But potentially the ROI on this debt, if they're using it to finance expansion and AI and other things, is so high that it almost doesn't matter. Is that the case for tech? Uh that remains to be seen. Uh and it's not just the debt, it's the lease obligations that is being created here. It is the higher depreciation expense that's going to be embedded in the earnings. So uh we we've basically with um the this AI data center buildout uh altered the business models of a lot of these companies the big hyperscalers from asset light highly cash generative businesses with high returns on equity to highly capital intensive businesses that are going to generate less cash flow at least for now and uh and and that obviously negatively impacts uh their growth rates earnings growth rates going forward. So, um I don't think you can analyze these companies and their stocks uh with the same lens as you did prior to uh all this spend beginning in the latter part of 2022 and into uh 2023. You mentioned quite a few assets in the beginning of the interview when I asked you about asset allocation, but the truth is Peter, it's not just tech stocks that have gone up. It's precious metals. Uh well, Bitcoin's down in the year, but relative to a year and a half ago, it's still up tremendously. And so people are talking about not just a tech bubble but an everything bubble. Jim and uh uh uh Peter but rather Peter uh so in that particular scenario what do we rotate capital too? Is there a safer place valuations wise? Well the bubble is is not is is in the capex spend part of AI. Um you know you you take precious metals are they a bubble? Well not really. when you look at over the last uh you know the the rise in central bank balance sheets the global rise in money supply um its percentage of total financial assets you know it's far from a bubble I mean you look at silver silver at $65 um while it's gone vertical here and and and it might be prudent to take a tiny bit off the table um it was $50 45 years ago so it's it's barely above where it was so that that that's not the hallmark mark of of a bubble. Um, so I don't I don't think there's a bubble in everything. There's a bubble in some things. Uh, but I wouldn't call that in everything. Certainly not a bubble in in oil prices uh with a barrel of oil at at $56. Uh, I wouldn't call a bubble in small cap stocks. They've been left for dead and international markets, which have done tremendously this year and I remain bullish on. You know, one year of outperformance doesn't qualify as a bubble. >> You already know why people hold gold. But it's because it's real money. But what if your gold could do more than just sit in a vault? Well, that's where our sponsor today, Monetary Metals, comes in. They offer a way for you to earn a yield on your gold paid in physical gold. Through their leasing marketplace, you can earn up to 4% yield per year in gold. Instead of paying storage fees, your gold actually works for you. And because that yield is paid in gold, not cash, your stack grows no matter what the dollar is doing. 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Well, it's it's what happens of this Gen AI tech trade and not just from the stock market perspective because they still they dominate the indexes as we know but if there's any issues with the stock market that's going to spill over into upper income spending which is a key support for the US economy and if the data center uh facility buildout slows down for whatever reason now of course the projects that are in in process they'll they'll continue on but if there are any delays days because of power access or whatever if there are any cancellations if there's any slowdown you know that could have economic repercussions as well since the US economy has been highly reliant on the data center building uh and and and generating GDP growth since you're on last year inflation has slowly trickled up far beyond the Fed's 2% target let's talk about your outlook on inflation any updates to inflation you've argued it wouldn't just go down to 2% and magically just stay there uh and given all the developments since 2024. What's your outlook now? >> Well, I still believe that we're not going we may go to 2% from a rate of change standpoint for a period of time, but I don't think we sustainably stay there. You know, one of the main factors that could do that is the slowdown in rents since that dominates the CPI. But we're already sewing the seeds for a further acceleration in rents probably sometime in the back half of next year into 2027 because currently we're absorbing a lot of supply in 23 and 24 that is tempering uh rental growth. But because there's been a notable decline in new construction of multif family, we are will eventually see a reaceleration because there's been very healthy absorption when it comes to uh all this supply because it's been very expensive particularly for first-time buyers to purchase a home. So I expect inflation volatility and to my point as you mentioned that I made last year, I don't expect us to go to 2% and magically stay there. We may go to 2% temporarily but I expect a real acceleration thereafter. Uh bottom line is I think inflation volatility is here to stay. I think the tariffs while technically is a tax and therefore a one-time impact on inflation. I think because it is sort of distorting and mixing around global supply chains to higher cost uh places uh its impact is going to be multiple years and I do think we're embedding a higher cost structure for a lot of companies uh because of these tariffs. How does that impact the Fed's decision then, especially since um well, we would still undecided as to whether or not it's going to be uh Walsh or uh or or somebody else or Hasset taking over Jerome Powell next year. But the the the the fact of the matter is whoever takes Pal's place is probably going to be more dovish than Pow himself. But on the other hand, like you said, inflation continues to stay sticky and elevated and be a problem. So where does that leave the Fed's decision? Well, whoever the next Fed chair is, yes, they're going to be cutting rates, but you know, PAL has been cutting rates, too. Uh it's just a question of how far they take rates. And I think a lot will depend on not just inflation, but the flow through of the rate cuts uh into the dollar because if the dollar takes another leg down, that's going to be inflationary. And if long rates go up because that part of the curb is not happy with the Fed rate cuts, then that's just going to offset and dilute uh the Fed rate cuts. So, I do think that there's uh a marketplace that is going to speak up if they think the Fed has taken the Fed funds rate too far uh relative to the economic factors that are out there. I understand the concerns about a slowing labor market. I see it. There's no question there's been a slowdown in hiring uh but with inflation still remaining well above 2% both on an absolute basis and on a sustainable basis, uh the Fed still has to be very careful with what they do. Uh, and going back to tech stocks, which is more important for the margins, the long end of the curve or the short end? >> Um, well, if you're looking to buy a house, the long end, of course, is more important. If you're looking to finance long-term projects, uh, the long end is certainly more important. If you're a sofur plus borrower, well, then you're more focused on where the Fed funds rate. So, it really depends on where along the curve uh, do you borrow. But the point is is that for now uh central banks have sort of lost the ability to influence the whole yield curve. The ECB has cut their deposit rate by 200 basis points and that hasn't stopped the German 30-year bun to go to 14-year highs. Uh the BOJ is about to raise interest rates interest rates which I think is very noteworthy and also will be a major bond factor in 2026 because it may not just be one more hike. uh it could be a few more next year and we've seen that as I mentioned earlier seen in the long end of the uh the JGB yield curve. >> So what is the trigger for the AI selloff? At what point in the steepening the yield curve do we see margins really start to compress and maybe it's not a factor of yields impacting the margins. Maybe it's something else Peter. >> Well the trigger's already happened. I mean look look at the stock price of Oracle and again not just before the sell off on earnings. it started to sell off well before that as people looked at and analyzed the extent of which they are creating their obligations uh debt obligations lease obligations and heavily reliant on open AI. Then you had coreweave people are questioning now their business model. You had I mentioned the the Gemini 3 and people questioning the open AI uh model relative to the competition uh with China with their open- source models creating a huge competitor with US technology. So the bell's been ringing multiple times now uh on this AI tech trade and uh I think that bell is going to continue to ring next year. >> You mentioned Japan earlier in the interview. What do you make of the fact that the Japan JGB ten year is now at the highest level since basically the mid 2000s? H is this going to cause a ripple effect on markets? Is the Japanese unwind unwind of the Japanese carrier trade going to happen? >> Well, I do think it's a really big deal. The long end of the yield curve is essentially tightened for the BOJ. I mean, even with a a BOJ rate hike to 75 basis points, they continue to drag their feet relative to inflation, which is running 2 and a half to 3 and a half%. So, the bond market said, "Hey, BOJ, we're not going to wait around for you. Uh, we're just going to tighten for you." And with respect to the carrier trade, I don't know what's left of the carry trade. I don't know how it it it is terms of uh size. uh but I do know that JGB yields are becoming much more attractive for global investors particularly Japanese investors that are still very heavily invested outside the Japan uh particularly in the US Treasury market. So uh if that yield rise does continue uh there's no question it can have ripple effects globally in terms of fund flows. As an investor are you more enticed to invest internationally away from US domestic companies because of interest rate differentials happening worldwide? not necessarily interest rate differentials somewhat that but I I just find that in terms of of of a value seeking investor that I am I'm finding just more opportunities out there I also do think that the US dollar which has had a tough year this year will continue to weaken I will get help uh investing internationally because of that and on the emerging market bond side to your interest rate differential point I do think local currency emerging market bonds are really attractive both because of uh the interest rate differential and also the very high real rates that they provide uh but also play on a weaker dollar. >> What do you make of the national deficit? Uh1 to2 trillion dollars a year I believe is the depending on which source you're looking at is the number we're running on right now. At what point does the market realize this is a problem or maybe it's not a problem? >> Well, the market I believe already realizes it's a problem and that's why one of the factors and why long-term interest rates around the world are going up. uh they're going up at Japan, heavily indebted, going up in the UK, heavily indebted in the UK, in in Germany, which is now ramping up fiscal spending in France, in the US. I think debts and deficits now do matter and um uh it's being reflected in in elevated long-term interest rates. >> Since Trump was uh uh was in office, which is after our last discussion, any particular trends in demographics or changes in demographic trends that you think are important for monitoring? Well, that that's more of a longer term uh play in terms of how it well I should say a longer term thing on how it plays out. Uh birth rates in in the developed world is slowing dramatically. Uh it's the worst in South Korea uh where I think it's under one. Um and and yeah, over time that that is a major thing that we need to pay attention to. uh how to react to it now. It's it's it's you really can't but uh over the next 10 20 years uh it's definitely important to gauge in terms of how it's going to impact uh global growth rates. >> Yeah, fertility rate uh is below two in many developed countries. But what about the immigration rates coming down for let's just focus on the US. How's that going to impact the labor market going forward? We're speaking today on uh we're mid December and the unemployment rate that just came in which is a few months old 4.4% 4% the highest it's been since 2021 I believe. >> Yeah. It's going to affect the supply side of labor no doubt but um at least for a portion of these uh immigrants uh well it's more it's illegal because legal it's perfectly fine to still come here but illegal it's you know they were mostly working in leisure and hospitality construction you know key key areas that we need people in. Um but it's hard to draw a broad branch broad brush. I think overall uh labor force increase is probably probably a a quarter to a a third of a percent which is pretty lackluster. Uh so you're going to really need strong productivity growth uh to generate um anything close to 2% GDP growth which we may see. AI may help that, but uh we'll have to see how that plays out because um without that that labor force growth, uh you you need that productivity increase to really drive overall growth. >> Okay, let's move on to uh commodities and hard assets. Now, since you're on the show in mid 2024, the silver price is up 160% give or take. Gold's up 90% almost 100%. Are we still in the middle of a commodity super cycle if that's what's happening right now? Peter, >> uh I don't like to use the words super cycle. I just think it's it's a bull market that will continue. Uh I do think from a portfolio management standpoint when something goes vertical uh it's important to just respect that that it's maybe time to take some chips off the table which we've done over the last um call it month in gold and silver but still remain very long and very positive. uh but acknowledge that when when something gets uh extended, it may be time for a break just as any sprinter needs to take a deep breath. But uh generally speaking, we still think that there's more upside and and and we're still long these commodities. My favorite commodity for 2026 though is oil. I think at $56 a barrel for WTI, it's probably one of the cheapest assets in the world and uh finding it a very attractive place to invest right now. uh as a contrarian. >> Is that simply based on uh current price levels compared to historical price levels or are you bullish on demand and and uh bearish on supply? >> Uh I it's both. Um right now the consensus is that we're swimming in too much oil. Uh I think it's that is exaggerated. I think that there's uh down here in the mid-50s there's going to be a big supply response. I mean, US shale, half of US shale doesn't make money um in the low 50s uh or high 40s. So, uh you will shut down half of that industry if oil prices fall much further. And the Saudis aren't happy with mid-50s oil either. And uh uh nor is the rest of OPAC. So, I wouldn't be surprised if there's a supply response there as well. >> Okay. So, we talked about the AI uh trade, but uh the the stock market uh the big indices S&P and NASDAQ, well, NASDAQ in particular, but just even the S&P, there's a huge concentration risk out there. And if you're somebody who is maybe not actively investing or trading, it's difficult to avoid this concentration risk. Is is this basically 2026 a year of stock picking? Is that what we're suggesting here? >> Well, I I think 2025 was as well. Uh and and I do think that that continues into 2026 is yes. concentration risk. We know that the top uh 10 stocks in the S&P are 40% of the index and technology generally speaking is about that ratio. Uh so yes, I do think that there's an opportunity uh to to do well relative to the S&P by picking stocks that are not included in that group. Uh because that group I think that trade uh is sort of exhausting itself here. So given that you think inflation will stay sticky, uh the long end of the curve is continue is going to probably continue to go up if not stay sticky around current levels. Uh do we how do you compare cash versus real assets uh versus yields? >> Well, um you know the bond market is not very attractive, you know, as we talked about. Uh if you want to have some cash, cash is always nice because it's dry powder or an optionality. And while central banks have been cutting interest rates, you still get a yield of some sort. Uh it's not like you get paid nothing like we did when we had 15 years of zero rates here and we had negative rates overseas. So cash is always important to have uh particularly if the market's going to have any difficulties next year if the AI trade uh continues to to to sort of lose its its dominance. Um commodities I do think you know as we talked about I think is an attractive place. Um I would add a to that too. We own some of the fertilizer stocks as a beaten up group. Um, so I do think that uh similar trends of 2025 with with a bunch of things working around the world, I'm hopeful that that can continue next year. >> And if let's say we were to fast forward a year or two from now, what do you think are the biggest market risks that investors are discounting right now? Is it just AI or is it something else? >> No, AI. Yeah, it's definitely as we said. Uh I think if long rates continue to higher, that'll be an issue. And we're watching if this hiring rate slows down in the US and uh that starts to negatively impact the economy, the data center buildout slows. Um we we we've seen a huge amount of money pile into private credit and usually when when when too much money chases uh something that there's there's not enough good loans out there for all that cash. That's something that I'm watching as well. Uh so a combination of those factors I think uh should be on sort of the investing dashboard uh of people as we as we look to next year. >> Well, if you just take a look at my screen right now, the advanced retail sales is published by the St. Louis Fed is still near all-time highs. In fact, actually it is on all-time highs. So people are still spending money. Uh the year-on-year change is not slowing down. Uh if you just take a look, >> that's a nominal term. So as you know, inflation helps that number. >> I see. So it's not just So what you're saying it's not more volume of spending. It's it's it's really just prices going up. >> Well, the last couple of years it's been a lot of that's price. >> Okay. But do you think that uh the K-shaped recovery, the economy that people are talking about that the wealthy are going to continue driving spending and so even if the labor market deteriorates for the middle class, it doesn't really matter? Do you buy that narrative? >> Well, uh well, yes, there's a wealth effect for sure with the stock market, but that means that the stock market needs to to hold up. I if the AI trade drags it down, uh, then that upper income spend is going to be put into question. >> What needs to happen for, I guess, the affordability crisis that the Trump administration keeps talking about to be solved? Is it something to do with fiscal policy? Do we just need to see a natural equilibrium of stock prices go down and housing prices correct with it? Um, is there something the government can do to intervene? Well, I think if the Supreme Court upholds the prior the the lower court's ruling that the president's use of emergency powers to implement tariffs, if that has proved to be unconstitutional, uh then we'll see a major tax cut in a variety of different things. That would certainly help the affordability issue. Uh I think most of the pain with higher prices is in the shelter side and uh I I think lower home prices while it would you know negatively impact the equity of of existing home buyers or or home owners I should say uh would certainly help new home buyers uh because they're the ones that are filling the affordability squeeze the most. Well, now that we've uh basically had almost a year of data on what happened or has happened since tariffs were implemented post Trump, who can you assess to be the real winners or losers coming out of the trade war this year? >> Um, I can't find too many winners. Uh, I don't think that trade wars create winners. Um, and there are plenty of losers, I believe. >> Well, from an investment standpoint, uh, how does this impact trade? uh were were your trades going forward if you if you let's assume that this continues >> well if it continues I mean I I think investors need to you know pay attention a lot I mean to how companies have mitigated it larger companies are much more flexible and able to uh to to to absorb the tariffs either through their vendor negotiations or their ability to pass through price or yes a lot of times they have to absorb it too but because they're big and they have juicier profit margins they can it's really been small medium-sized companies that have been most damaged uh by the tariffs and that's why I'm hoping they get some relief and if they don't uh then that will negatively impact them. I mean if you look at hiring small business hiring really took a leg down beginning in April just when the tariffs really hit us. So uh I think that that is is noteworthy. >> Okay. Finally, uh anything that surprised you for 2025 that you weren't expecting investment wise and uh what can we learn from that? Um, I'm surprised that oil prices have fallen as much as they have. >> Um, not much else really has. Uh, I I not much not much. I mean, there's always something that surprises. No one has the the the the ultimate crystal ball and uh for sure, but um uh but it's a good question. Well, what one thing that surprised me initially and maybe some other people maybe not, but the DXY fell on liberation day on April uh April 1st and 2nd and you know it's pretty much stayed rangebound ever since. You would expect just looking at Trump's first term that the dollar would appreciate versus other currencies when tariffs are implemented. Why didn't it happen this time around? Well, yeah. On paper that was supposed to be the outcome, but I think you pissed off the whole world and everyone said, "Well, do I want to own as many US assets?" And if I do want to own uh the same amount of US assets, uh I'm going to hedge my exposure and we've seen a lot of foreign hedging uh of dollar exposure of on their their their US dollar assets. Uh so while they maintained and maybe even increase in certain areas uh US asset holdings uh they've dramatically increased the level of hedging. So you can actually see coming into April uh the the year prior there was a pretty good relationship between the the dollar index and the MAG7 trade. The MAG7 trade essentially became a reserve asset for foreigners. They piled on to the same trade as US domestic investors did. But after April, um the US stock market had a nice rebound off those lows, but the dollar still was stuck in the mud. And I think that is because a lot of the hedging that has taken place uh against owning US assets from a foreign perspective. >> Okay. Well, let's just take a look at that. Uh so we have here the DXY overlay with the NASDAQ and I just want to get your perspective here. in the past. Uh not a huge direct correlation, but you can just see the NASDAQ take off and here the blue line uh irrespective of the dollar just flatlining around here ever since April. And so this divergence between the dollar and the NASDAQ um you know can how can we explain that given what you've just said? >> Well, no, I just explained it. It it was buying US tech stocks but hedging uh that exposure rather than uh buying it on an unhedged basis. Uh and there's no doubt with the blue chart blue the blue line is that you know the AI tech trade got a second wind after both the deepseek news in late January and the tariff news in early April. But uh again heavy uh hedging uh that I think helps to explain uh that divergence post April. >> So what's your outlook for the DXY in 2026 especially given that the long yield long end of the yield curve is expected to stay high. I think if the Fed keeps on cutting interest rates and uh I think if this trade war continues on uh the dollar and if the AI tech trade softens and and global investors start to sell uh I think that's going to be negative for the US dollar. >> Excellent. All right. Thank you very much Peter. Appreciate your thoughts. Uh where can we follow you? I mentioned we have a you have a Substack the book report. Where else? >> So yeah, type in my name in Substack and uh they can check that out. I write daily on the macro and markets. And then on the wealthmanagement side, they can check out our website onepointbg.com to learn more about what we do. >> Okay. Thank you very much, Peter. Appreciate your thoughts. Happy New Year. Happy holidays and we'll see you again in 2026. >> Thanks so much. >> And thank you for watching. Don't forget to like, subscribe, follow Peter in the links down below.