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 a new “chairman” has taken the helm of market direction—oil.

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

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 cease participating in the rally, and geopolitical conflicts trigger a commodities bull market, the market faces serious stagflation risks.

AI Trading’s “Last Stand” Is Crumbling

Boockvar believes that the AI-driven 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 is heading in the same direction. Meta and Google still generate positive cash flow, but only a fraction compared to previous spending levels. That’s what investors are now focusing on. Nvidia, despite an excellent quarterly report and positive product news, also cannot rally.

For me, when nearly half of the stocks in the S&P 500 are no longer participating in the rally, it adds a layer of vulnerability to the market. The support comes from rotation into other sectors.

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 sharp rises in crude oil and natural gas prices, the Fed’s policy space is severely constrained.

• Inflation pressures are transmitted from the wholesale side: The latest PPI data shows that even before factoring in recent oil price rebounds, inflation pressures are already severe. Boockvar criticized some Fed members for focusing solely on 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 with rate cuts, high oil prices keep long-term yields (10-year Treasury yields) elevated, continuing to weigh on real estate and credit markets.

“If oil stays at $100, I don’t see how the Fed chair would dare 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: After a significant drawdown of the U.S. Strategic Petroleum Reserve (SPR), countries will start stockpiling oil, natural gas, fertilizers (nitrogen, phosphorus, potassium), and industrial metals (copper, nickel, silver).

• Agricultural inflation rally: With fertilizer raw materials (ammonia, sulfur) hindered by Middle East tensions, the agricultural bull market has begun. Although there’s a lag, when 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 over the $2 trillion private credit market.

He pointed out that the average credit rating in private credit is only single B or even CCC, with large amounts of capital flowing into highly leveraged PE buyouts. 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, the testing begins.”

S&P 500’s 21x P/E: No Way Out

Currently, the S&P 500’s P/E ratio stands at 21 times, which Boockvar believes offers 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 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 (like Brazil, CAD, AUD), rather than blindly chasing overvalued tech giants.

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 live 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. What’s your sense? What are investors reacting to?

Peter: On Monday morning, I titled my notes “Is it Friday yet?”

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

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

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

I believe, at least for cloud giants, investors are now truly scrutinizing and reevaluating their valuation multiples because their free cash flows are deteriorating.

This year, Oracle will show negative free cash flow, and Amazon is heading that way too. Meta and Google still have positive cash flows, but only a fraction compared to before. That’s what investors are now paying attention to. Nvidia, despite an excellent quarterly report and positive product news, also can’t rally.

For me, when nearly half of the stocks in the S&P 500 are no longer participating in the rally, it adds a vulnerability to the market. The support comes from rotation into other sectors.

Of course, the war broke out, and commodity prices surged sharply, especially oil and natural gas, which poured cold water on the situation.

Right now, I believe the Fed won’t cut rates in the short term. Long-term rates are rising again globally. And the market’s pricing doesn’t account for these “heavy hits.” I don’t want to say it’s a “punch to the cheek,” but it’s just a “jab 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 before the war started, the market was already fragile due to the loss of 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. That’s a big deal for the cost of capital for many companies.

It’s also significant for the large insurance companies pouring into private credit. It’s a huge sector. Some say $2 trillion 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 “jab to the chin.”

Many comments suggest that, considering what’s happened, the market seems quite resilient because it anticipated 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 new information—we don’t have many details yet, much of it from X and various sources, so we should be cautious—Israel may have struck Iranian 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 pricing in a “quick end” too high? Why do you think it will end quickly rather than drag on?

Peter: Regarding market reactions, 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: don’t short key commodities.

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

Look at the U.S., under Biden, we’ve used half of our 700 million barrel Strategic Petroleum Reserve, 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 the Iranian regime there’s no one to negotiate with, the process will be prolonged—without negotiations, it can’t end. Dancing takes two, and resolving issues also requires both sides. We can’t just say, “Great, we 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 metals bull market of 2025 is already underway, now expanded into energy. Without even knowing there’s a war, I’m 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—2-year and 5-year breakeven inflation rates have returned to April last year, when everyone was worried about tariffs—they’re starting to reflect some of this, but I don’t think the market is pricing in high inflation and its persistence.

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

I hear 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 rise 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 are talking about four rate cuts this year—what are they looking at? I understand you want to follow the President’s wishes, but don’t you care about your reputation? I get 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 already removed two rate cuts from his forecast, which is a sign of facing 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 and define its impact on employment.

Many small and medium enterprises won’t hire when hit by tariffs, insurance, and energy costs. But I’m not pessimistic about AI; long-term, it will boost efficiency and productivity, leading to more economic activity and jobs. 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 all filled with fear right now. Do you see a risk of entering a stagflation environment?

Peter: Absolutely. Before entering such a scenario, the economy was already very complex. High-income spending and data center construction contributed significantly, along with nearly $2 trillion in budget deficits. But other parts of the economy are basically in recession: real estate, manufacturing, non-data center capital expenditure are all stagnating.

If you add higher inflation now, low- and middle-income consumers are under enormous pressure—gasoline prices have risen nearly a dollar in a few weeks. 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 notes, “The Fed has a new chairman, and it is oil.” Will this create 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 choices: 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. After 175 basis points of cuts, the 10-year yield isn’t 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 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 hedges. When oil was at $60, I said it was one of the cheapest assets globally. The problem with gold and silver is that they surged too much in late December and early January, needing 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 touched it. Is the fertilizer sector just starting to run?

Peter: I think it will lag behind oil and natural gas. Fertilizer prices are already soaring because sulfur, urea, and ammonia production in that region is ramping up. 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 and oil prices rising together, 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 delays, 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 purge?

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

Peter: Apollo recently criticized the software industry for a lot of 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 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 long-term bullish on international and emerging markets, like Brazil, which will benefit from high prices. The Canadian dollar and Australian dollar, resource currencies, are also performing better than the euro or 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—key economic support—will falter. Over the past few years, I’ve talked 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 of 21 times offers no safety margin. If it were 15 times, we could absorb shocks, but at 21 times, it’s not possible.

Maggie: Micron just reported earnings—revenues nearly tripled, beating expectations. But after-hours, it dropped 2%. Seems like good news is exhausted?

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

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

Peter: Thanks, Maggie.

Maggie: Thanks, everyone. See you on Friday. Good luck.