A rate cut won't affect the economy much but the Fed will still try, CIO says



Jim turned to you first they're gonna cut in July or not more than likely I mean that's certainly the signal they've sent between the mantra policy report last week the appearance is from Powell in each of the previous two weeks and so I think they've pretty much laid the groundwork here I mean obviously the employment report was pretty solid but they're worried about the trade related uncertainties hanging over the economy inflation is very muted they've clearly given us the signal that they're going to go probably by a quarter point so the future of the rally then is hanging on this well I don't think there's every word move and everything else from the Fed I think everyone is a little bit fixated about it but for good reason which is that the market expectations for the feds you know rate cut are extremely important but at the end of the day it's going to turn out to be about earnings and about what's going to take place over the course of the next you know really the next quarter or two and we think the market expectations are simply too high right now for earnings if you look out to next year you know we're talking about 11 percent earnings growth whereas this year you know we're just trying to hit these incredibly low bars of like 1% or 2% and that's what the bond market is telling you you know you have lower expectations and so yeah the right we're waiting for the Fed because that's what they need to keep equities higher so your negative stocks yeah we just actually reduced on June 17th we reduced our equity allocation to underweight by about 3 percent which for us is a significant move and we've also increased the quality of stocks that we want our customers to own as well as to move money offshore because that is where the biggest benefit of lower interest rates will actually be not here in the US are offshore well I mean we like some of the latin-american countries we like Brazil we liked a lot of the South Asia countries we think valuation wise they're they're very attractive and growth wise as well even the jobs numbers seem to give the market a little bit of an occasion for a rethink of maybe just how much is gonna be behind a July cut or how dramatic the the Fed easing is going to be how much dispensed do you think there's gonna continue to be about exactly where we are in terms of what the feds expectations are whether this is just going to prove an insurance cut or whether it's going to be necessary man well I mean that's that's always the case I mean we're gonna be constantly watching new data as they come in and certainly at this point there is some evidence of slowing even with that payroll number the trend so far this year is a little over 170 thousand a month whereas year was two twenty-something so there's some moderation there and meanwhile I mean the Fed is pointing not so much to the current numbers as the uncertainties related to trade the fact that inflation is the same as it is to justify some easing but the signal is that it's not dramatic easing now that said if the numbers start weakening significantly that's a different story you're pushing them sorry you're pushing against powerful forces though being being negative stocks it's not gonna even if the Fed moves our once this month and you get progression on on trade those are absolute positives for stocks no I would agree with you that they are positive for stock so over the longer term well we look at is principal evaluations you know as really what's going to drive it but to put us back to where we were let's say last October and November everyone that at that point was worried about the Fed overshooting now what we're talking about is the Fed saving the day what's really different about this economy versus that and the answer is not very much so what's happened now is rates have come down significantly and then the question is what is growth and that's where I think valuations and portfolios have to really consider what they own Peter what why do you think the Fed ends up in the end of the end of the month well they're Dell kite and it's a Mike's point is Whittle what would they do after is this the beginning of a rate cutting cycle or is this a 1 and let's play it by ear thereafter and I think an important question is what will it do the bond markets already cut for the Fed if you're buying a home well you just saw the average mortgage rate drop 75 basis points over the past year you just got a you got 3 rate cuts if you're a home buyer so what is what behavior is the Fed going to encourage by a rate cut that will help the economy I argue that there's probably not gonna be that much of an effect but they're at least going to try and see what happened does it affect the dollar I think the dollars are already weakened I mean well the dollar index it at 97 you know topped out over a hundred a couple of years ago you know the dollars fighting whether it's its own worries about debts and deficits but you look a look at the euro euro trades really well you look at all the issues that Europe has a negative interest rates and Lagarde now and going deeper into negative interest rates the dollar has issues and certainly rate cuts are not going to help this is a great question of what Jim cutting interest rates is really going to do to Peter's point others have made it whether it Richard Fisher or others whether you know it gets the stock market to go up but does little to spur corporate investment in other areas that would actually help the economy there presumably is some feed through from the equity mark and the tone in the equity market to business confidence in general which does affect business investment and I think would be a different story if the equity market was down 20% right now and the Fed had held stubborn so I don't think there's any doubt that there is some pass-through from the equity market abroad economy and mortgage rates are down but housing is actually up when you look at the q2 GDP numbers as they're adding up right now and that's one part of the economy that looks like it actually picked up in the second quarter the residential investment part along with consumer spending so I mean I and the end of the day is well I think you have to keep in mind that the feds not trying to get us get back up to 3% plus growth they would love that if productivity were soaring but they're basically just trying to prevent the downside here and they're happy with 2% growth and unless of course productivity is a lot stronger David you suggest with this cautious stance on equities that you know earnings forecasts probably have to come down right they look a little bit vulnerable going into next year and the multiple maybe he's gonna have to adjust but what about this premise that you know a lot of investors start with says look if there's no recession then usually you don't get big down moves and stocks that stay that way I mean if that was that legitimate or right being underweight stocks doesn't mean selling stocks right and one of the things we advise clients to do is not to market time you know if you miss 40 days over the last ten years you took your returns down by 10 percent so you can't do that but what you can do is actually decide where you want to be in the market the Fed was originally in a posture to actually prevent us from dealing with a potential recession that's not what they're doing now their policy has changed materially and as a result of that we're actually taking bullets that we might expend in a difficult situation and we're spending them now to maintain you know the the growth or some you know amount of growth and in the future that's not a particularly bright forecast so I hear you but if you have already made as much money as investors have made over the course of the last eight to ten years you want to rebalance your portfolio now Jim what do you make of the president's fed nominees and does that alter the likelihood of what the next couple years of action is gonna be well from what's known about them they're certainly viewed as on the dovish side I mean they're not going to determine policy I mean even the the st. Louis Fed research person's boss of course was on the dovish side already so and I mean they are leaning that way already in terms of dovish ness I don't think one or two other people especially if they have different sort of frameworks generally they're not necessarily going to influence people dramatically and but they add to the dovish the Fed right now again do they mean the Fed is going to be moving aggressively without the economic numbers being weak no but they certainly will add to the feds dovish ness you




Comments
  1. Let me help you oligarchs out, stop giving the money only to the same rich people, over and over and over and over again, give it to the poor and watch the economy work again, geee, was that not taught to you rejects back in Econ 101? Hang them all, it is the only real solution sadly.

  2. Being the Fed chairman has to be the crappiest and most soul stealing job in the country.

    It must feel like Benedict Arnold felt like when he betrayed our trust.

    People like Powell have to do there job knowing they are screwing their fellow Americans every day.

    I would jump in front of a garbage truck first.

    These central banks regardless of the country have zero loyalty to their country.

    They are loyal to money and they really don't care if they make yours worthless as long as they get some currency….any currency that improves their finances.

    They are equivelant to ticks on a dog.

  3. Powell is the man, no cut
    No need, save it for real bad times.
    Bernanke created this rigged game and is the biggest criminal in the world

  4. Guys, I am thinking. They are going to lower the interest rates down. Well. The question is do we really need need interest rates at all? In some religions for example is interest prohibited. Why? Because it forces people to create another and another money, which deforms everything. So according this logic we have to get rid of any interest rates. But the problem is when we do this, it will be the end of global growth. So, we are in a Dead end.

  5. "Worried about the trade related uncertainties". That' a distraction for the sheep, American consumers are the weakest they've ever been in an economic "expansion" in all of history. You call debt-laden consumers driving this economy a real economic recovery?

    Wait till the expansion is over. This is just a plot from the central bankers to squeeze the lower class for population control.

  6. What kind idiot thinks earnings have anything to do with this equity bubble? If that were the case then we wouldn't be up 22% on a fed pivot.

  7. Some say that the Federal Reserve is insolvent. Bankrupt. They owe US more than we owe THEM, ""they say"". Wouldn't that cancel the so called ""national debt "" ?

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