This week Paul Kiker and I discuss the historical fact that it’s only after the Fed starts cutting rates that the equity markets take a tumble. As they say, It ain’t over until the Fed funds sink!
Also, more and more oil-savvy people are beginning to note that the oil markets seem to be under some form of manipulation designed to drive prices lower. Why? Probably for political reasons.
Or, possibly, oil is weak because there’s a rip-roaring recession on the way that will dent demand. Either way, oil is not at a constructive price to deliver future supplies.
Who can we thank for that? A toothless array of regulators who encourages massive amounts of electronic buying and selling activity by speculators who have zero ties to the actual underlying physical product.
So the signal is swamped by the noise. In the end, this is not good for producers or consumers. Both suffer. But it makes boatloads of money so it is allowed and encouraged.
Finally, we also discuss the fact that rate cuts aren’t really rate cuts in the old sense of the term. Once it meant more cash being put into the system. Now it means the Fed turning down the dial on how much it pays to banks for their excess reserves parked at the Fed.
Which means now it is a sloppier transmission mechanism with even less coupling to the actual economy. After all, how many marginal business or consumer decisions are waiting on a 25 or even 50 bp lower rate?
So the prediction is any interest rate cuts will have a very temporary boosting effect for the equity markets that will quickly fade. It is only when the Fed returns to QE will the dynamic change.
For that to occur, we think the Fed needs a reason. Or sets of reasons. Better yet, an emergency! When the QE begins again, then it’s time to go all into risk assets and all out of dollars themselves because inflation will return with a 1970s-style vengeance. Heck, only might happen anyway if we get an energy shock.
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