Market-Recognized Fed "New Chair": Oil

As U.S. stocks turned negative during Wednesday afternoon trading, investors are being forced to face a harsh reality: expectations of rate cuts are fading into the distance, and the “new chairman” guiding the market has changed.

Recently, Peter Boockvar, Chief Investment Officer of Bleakley Financial Group, pointed out in an interview with Maggie Lake that even without the Middle East conflict, the fragility of the U.S. stock market has already become apparent.

Boockvar warned that the trading benefits related to generative AI strategies are waning, and oil prices’ surge is now taking over the reins of monetary policy. When nearly half of the S&P 500 components are no longer participating in the rally, and geopolitical conflicts trigger a commodities bull market, the market faces serious stagflation risks.

The “Last Bastion” of AI Trading Is Easing

Boockvar believes that the generative AI (GenAI) trading that supported the market in the first two months of this year has already begun to weaken.

“Look at those mega cloud computing giants, even Nvidia—these stocks can’t shake off their downward trend,” he emphasized. “Investors are starting to scrutinize and reassess the valuation multiples of these companies because their free cash flows are deteriorating.”

This year, Oracle is expected to show negative free cash flow, and Amazon will also face negative free cash flow. Meta and Google still generate positive cash flow, but only a fraction compared to previous levels of spending. That’s what investors are now focusing on. As for Nvidia, despite an excellent quarterly report and many positive product news, its stock also cannot rise.

To me, when nearly half of the components in the S&P 500 are no longer participating in the rally, it adds a layer of fragility to the market. The support comes from sector rotation into other areas.

Oil Takes Over the Fed, Rate Cut Expectations Die

Boockvar presented a striking view: the Fed now has a “new chairman,” and it is oil.

With geopolitical conflicts causing crude oil and natural gas prices to soar sharply, the Fed’s policy space is being severely squeezed.

• Inflation pressures are transmitted from the wholesale side: The latest PPI data shows that even before factoring in the recent rebound in oil prices, price pressures are already very bad. Boockvar criticized some Fed members for only watching CPI—“If wholesale pressures are huge and companies can’t pass them on, inflation isn’t gone; it’s just stuck in the supply chain.”

• Uncontrolled yield curve: The market’s expectation of four rate cuts is unrealistic. Even if rates are cut, high oil prices will keep long-term yields (10-year Treasury yields) from falling, continuing to weigh on real estate and credit markets.

“If oil stays at $100, I don’t see how the Fed chair would dare to cut rates.”

Commodities Bull Market: We Need to Return to “Stockpiling Era”

Even if the conflict ends tomorrow, Boockvar doesn’t believe oil prices will return to $65. He pointed out that the pandemic and global trade frictions have taught the world a lesson: don’t short key commodities.

• Massive global stockpiling: Following a significant drawdown of the U.S. Strategic Petroleum Reserve (SPR), every country will start stockpiling oil, natural gas, fertilizers (nitrogen, phosphorus, potassium), and industrial metals (copper, nickel, silver, etc.).

• Agricultural inflation rally: As fertilizer raw materials (ammonia, sulfur) are hindered by Middle East tensions, the agricultural bull market has begun. Although there is a lag, when the harvest season arrives in fall, rising grain prices combined with high oil prices will pose a serious cost crisis globally.

Private Credit: The Hidden “Skeleton”

Beyond geopolitics, Boockvar expressed deep concern about the $2 trillion private credit market.

He pointed out that the average credit rating of private loans is only single B or even CCC, with large amounts of capital flowing into highly leveraged PE buyout projects. As capital costs rise and retail redemption pressures increase, this opaque sector could trigger chain reactions. “Too much money chasing too few quality loans—once the economy slows down, the testing begins.”

S&P 500 at 21x PE: No Way Out

Currently, the S&P 500’s P/E ratio is as high as 21, and Boockvar believes there’s no margin of safety.

“Had it been 15 times, we could absorb shocks. But at 21 times, with AI trading slowing and high-income consumers’ spending constrained, the economy is sliding into stagflation.”

He advised investors to focus on defensive stocks less affected by the economic cycle (such as Nestlé, Universal Music) and resource-based currencies and markets of resource-rich countries (like Brazil, CAD, AUD), rather than blindly chasing tech giants already priced to perfection.

Below is the full interview, translated by AI:

Maggie: Now is the time to reduce risk exposure. Hello, I’m Maggie Lake. Today I’ll be discussing the markets with Peter Boockvar, Chief Investment Officer of One Point BFG Wealth Partners. Hi, Peter.

Peter: Hi, Maggie. Glad to see you again.

Maggie: Great to see you. For those watching on Substack and YouTube, if you haven’t subscribed yet, please click that button—we really appreciate your support. Peter, I feel like we’re rushing toward the finish line because the market turned clearly negative in the afternoon session. What’s your sense? What are investors reacting to?

Peter: On Monday morning, my note was titled “Is it Friday yet?”

Maggie: Exactly, that’s how I felt too—made me laugh.

Peter: I think I need it (Friday). Before the war started, I already believed it increased the market’s current fragility.

In the first two months of this year, the most notable thing was the weakening of generative AI (GenAI) trading. The last bastion was storage and memory sectors, but look at those mega cloud giants, even Nvidia—these stocks can’t shake off their downward trend.

I believe, at least for cloud giants, investors are starting to truly scrutinize and reevaluate their valuation multiples because their free cash flows are deteriorating.

This year, Oracle is expected to show negative free cash flow, and Amazon will also face negative free cash flow. Meta and Google still generate positive cash flow, but only a fraction compared to previous levels of spending. That’s what investors are now focusing on. As for Nvidia, despite an excellent quarterly report and many positive product news, its stock also cannot rise.

To me, when nearly half of the components in the S&P 500 are no longer participating in the rally, it adds a layer of fragility to the market. The support comes from sector rotation into other areas.

Of course, the war has broken out, and commodity prices, especially oil and natural gas, have surged sharply, pouring cold water on the situation.

Right now, I believe the Fed won’t cut rates in the short term. Long-term interest rates globally are rising again. And the market’s pricing doesn’t account for these “heavy blows.” I don’t want to say it’s a “punch to the cheek,” but it’s just a “punch to the chin” for now.

But the longer the war lasts—though I don’t necessarily think it will go on that long—it has already caused enough pain. Investors need to understand that even before the war started, the market was already fragile due to the decline in generative AI trading.

Maggie: I think that’s a very important point.

Peter: One last thing, sorry to interrupt. Private credit also adds to market fragility, and concerns there are spreading. It’s a big deal for the cost of capital for many companies.

For insurance companies that have poured into private credit, it’s also significant. This is a huge sector. Some say the $2 trillion asset class isn’t a big deal, but I think the potential for chain reactions is enormous. That’s another thing we should worry about.

Maggie: I’d like to circle back to that later. Regarding the war, you said it’s just a “punch to the chin.”

Many comments have noted that, considering what’s happened, the market seems quite resilient because it had already anticipated some of this in the short term. We just saw many headlines pass during the Fed meeting, coinciding with the situation, so things were uncertain for a while.

Now, it seems there’s a new development—we don’t have many details yet, much of the news comes from X and various sources, so we should be cautious—Israel may have struck Iran’s infrastructure, Iran now says it will “take off the gloves,” and any target could be attacked. Qatar’s LNG facilities might be hit, and Saudi Aramco’s refinery in Riyadh could also be targeted. Is the market too optimistic? Are they overestimating the “quick end” scenario? Why do you think it will end quickly rather than drag on?

Peter: Regarding the market’s reaction, a few points: we think it will end, so don’t sell yet.

Then you get situations like today, especially with Qatar’s Ras Laffan facility, which supplies a large portion of global LNG—about 20% of global LNG comes from that region and facility.

Then you reach a point: “Damn, it won’t end quickly.” Even if it does, we’re damaging a lot of infrastructure, which will prolong high prices. But even if it ends tomorrow, I don’t think oil prices will quickly fall back to $65. I believe other commodities will behave similarly. The world should be reminded post-pandemic that you don’t want to short many key commodities.

So when all this dust settles, you’ll see massive global stockpiling of all major commodities.

Look at the U.S.—under Biden, we’ve used half of the 700 million barrels in the Strategic Petroleum Reserve (SPR), down to 420 million barrels, and now another 177 million barrels are being drained. Every country will start stockpiling oil, natural gas, nitrogen, phosphorus, potassium fertilizers, copper, nickel, lead, silver, and more. So prices will not return to previous levels. No one knows when this will end.

I think, because even within Iran’s regime, there’s no one left to negotiate with, the process will be prolonged—without negotiations, it can’t end. Dancing takes two, and solving problems also requires both sides. We can’t just say, “Great, we’ve destroyed them, let’s walk away.”

Because the regime remains. We need to start thinking about what happens after it ends, as the Strait will eventually reopen.

But my view is, we can’t go back. I believe the 2025 bull market in precious metals and industrial metals has already begun, and it has now expanded into energy. Without even knowing there’s a war, I’ve been very bullish on oil. Now we have a comprehensive commodities bull market, and there’s a long road ahead.

Maggie: Do you think this is already reflected in current market prices? Has the stock market priced it in?

Peter: The P/E ratio of the S&P 500 at 21 times definitely hasn’t. The 10-year yield at just 4.25% also hasn’t. While inflation expectations are rising, with 2- and 5-year breakeven inflation rates back to April last year levels—when everyone was worried about tariffs—we’re starting to reflect some of this, but I don’t think the market is pricing in high prices and persistent inflation.

Look at today’s Producer Price Index (PPI), it’s very bad, and that’s data from February, before the current situation.

I see Fed members talking about inflation, and they believe the only measure is CPI. But if wholesale prices have huge pressures and companies can’t pass them on, CPI might grow less, but that doesn’t mean inflation is gone; it’s just stuck elsewhere in the supply chain. That’s still huge price pressure.

We also have people like Steven Myron, who expect four rate cuts this year—what are they looking at? I understand wanting to follow the President’s wishes, but don’t you care about your reputation? I understand concerns about the labor market, but if inflation is rising and costs are increasing, you can’t stimulate hiring by cutting rates. High cost pressures will reduce hiring motivation because companies want to protect profit margins. So the idea of “ignoring inflation to cut rates and help the labor market” is a false premise. We need to control inflation first.

Maggie: But raising rates hasn’t helped either, has it?

Peter: No, I think the prudent approach now is to wait and see. Steven Myron thinks today is the day for a 25 basis point cut—I don’t know what world he’s living in, except academia. He’s removed two rate cuts from his forecast, which is a concession to reality. If what you say is true—cost pressures make companies reluctant to hire—and we’re in an era where AI might help them avoid hiring, that seems structural, not temporary.

Peter: I see remarkable performance from AI; I know it will disrupt some jobs, but it’s still too early to quantify its impact on employment.

Many small and medium-sized businesses, hit by tariffs, insurance, and energy costs, are not hiring. But I’m not pessimistic about AI; long-term, it will improve efficiency and productivity, driving more economic activity. Looking back over thousands of years, technological progress always does this. Some jobs will disappear, but new ones will emerge. It’s just too early to quantify now.

Maggie: That’s a good reminder, because we’re currently overwhelmed by fear. Do you think we’re facing a stagflation environment?

Peter: Without a doubt. Before entering such a scenario, the economy was already very complex. High-income spending and data center construction contributed greatly, along with nearly $2 trillion in budget deficits. But other parts of the economy are basically in recession: real estate, manufacturing, and non-data center capital expenditure are stagnating.

If we add higher inflation now, low- and middle-income consumers are under immense pressure from gasoline prices rising nearly a dollar in a few weeks. So the economy was already fragile, and now this. Yes, it’s stagflation. What does that mean for investors? I don’t know, but I believe valuation multiples will be lower than before the war.

Maggie: You mentioned in today’s note, “The Fed has a new chairman, and it is oil.” Will this cause a huge conflict with the White House? Especially since Warsh’s nomination is still uncertain, but even if Walsh comes in, will tensions between the Fed and White House intensify amid the commodities backdrop?

Peter: Yes. The White House has two options: either push for rate cuts, which would lead to higher long-term rates; or keep rates steady, keeping the 10-year yield below 4.5%.

You can’t control the yield curve at will. It’s a trade-off: do you help floating-rate borrowers or those buying homes, cars, using credit cards, or investing in real estate? Rate cuts won’t lower the entire curve. We saw that after 175 basis points of cuts, the 10-year yield was not lower than before. The ECB cut 200 basis points, but long-term yields remain high. So this is very complex for the new chair. Oil prices will determine the direction of long-term rates and dominate monetary policy. If oil stays at $100, I don’t see how the Fed chair would dare to cut rates.

Maggie: Is the possibility of the U.S. implementing an export ban increasing?

Peter: No, I don’t think so. The White House has enough people who understand that would cause significant damage. That’s not the route they want to take.

Maggie: How do you consider opportunities and risks in your portfolio? Gold and silver are falling, which confuses those relying on them for hedging. What’s your view?

Peter: Oil and agriculture are safe havens. When oil was at $60, I said it was one of the cheapest assets globally. The problem with gold and silver is that they had a huge run at the end of December and early January, and need months to digest. Plus, after the war started, the dollar strengthened and rate cut expectations receded, which are negative factors.

Eventually, the market will refocus on gold, and it will resume its upward trend, but now it’s in a consolidation phase.

Maggie: Agriculture is interesting because many people haven’t engaged with it. Is the fertilizer sector just starting to take off?

Peter: I think it will lag behind oil and natural gas. Fertilizer prices have already surged because the region produces sulfur, urea, and ammonia. The agricultural bull market has begun, but since it’s only planting season now, the impact on corn, soybeans, and wheat will only be known at harvest in October and November. So there’s a lag. If you see food prices rising along with oil prices, that would be a serious inflation problem.

Maggie: An audience member asks, “If the war drags on for six months, what should I buy?”

Peter: If it really lasts until April or even longer, a global recession is almost certain. Then you’ll want exposure to agriculture and energy. Although recession would reduce demand for industrial metals and cause them to lag, you still want hard assets. If the war continues, a global recession is almost unavoidable.

Maggie: What about private credit? It was under pressure before—will there be a big wipeout now?

Peter: Private credit’s average credit rating is at most single B, with many CCCs. If the economy slows, problems will arise. Also, private credit and retail markets for equity are a mistake because of mismatched durations. This will increase capital costs for small and medium-sized businesses. Especially with little transparency, no one knows where the “skeletons” are hidden.

Peter: Apollo recently criticized the software industry for many bad debts, but I think they’re a bit arrogant.

Fitch’s data from a few weeks ago showed default rates at 5.8%, with healthcare providers and consumer goods having the highest defaults; software was third. If you lend to sensitive sectors, you’re testing now. Of course, there are good lenders and bad ones—too much money chased too few quality loans in the past.

Maggie: What about international markets? You’ve always liked Asia, but most are energy importers. Will you reconsider?

Peter: Europe is also heavily exposed. International markets performed well in the past two months but are now becoming volatile. I try to focus on companies less sensitive to the economy, like Nestlé, Veolia, or Universal Music, which are more resilient. But I remain bullish on international and emerging markets long-term, like Brazil, which will benefit from high prices. The Canadian dollar and Australian dollar, resource currencies, also outperform the euro and yen.

Maggie: Finally, what’s the biggest risk?

Peter: If AI trading continues to slow down because it dominates the S&P 500, and the stock market declines, high-income consumers’ spending (a key economic support) will be affected. Over the past few years, I’ve spoken with economists who only give GDP forecasts, not stock market predictions, but they’re intertwined. If stocks fall, you won’t get 2.5% GDP growth. Also, the current P/E ratio of 21 doesn’t offer any safety margin. If it were 15, we could absorb shocks; at 21, it’s not possible.

Maggie: Micron just released earnings, nearly tripling revenue and beating expectations. But after-hours, it fell 2%. It seems all the good news has been priced in?

Peter: Storage and memory are the last link in AI trading, but there’s no more cyclical industry than storage.

Maggie: The risks are high. Peter, it’s been great talking with you.

Peter: Thanks, Maggie.

Maggie: Thanks, everyone. See you on Friday, and good luck.