Powell Fails, Trump Rails & The Failure Of Negative Rates

Let’s start with a simple chart: 

This has been an impossible market to effectively trade as rhetoric between the White House, the Fed, and China, has reached a fevered pitch. 

On Friday, several things happened which have at least temporarily significantly heightened market risk.

Jerome Powell disappointed the markets, and the White House, by sticking with their previous guidance concerning monetary policy actions. To wit:

  • We Will Act As Appropriate To Sustain The Expansion (Will cut rates if needed)
  • Says Events Since The July Fomc Have Been `Eventful’(Trade War/Tariffs)
  • Carefully Watching Development For Impact On U.S. (China/US Trade)
  • Monetary Policy Has No Rulebook For International Trade 
  • We’ve Seen Further Evidence Of A Global Slowdown (Germany in recession)
  • Fitting Trade Policy Into Risk-Management Framework Is a New Challenge
  • Fed Faces Heightened Risk of Difficult-to-Escape Periods of Near-Zero Rates (Neg. rates)
  • U.S. Economy Has Continued to Perform Well Overall(No rush to cut rates)
  • Sees Financial Stability Risks as Moderate, but Will Remain Vigilant

However, this commentary was not a surprise to us. We have suggested for several months the Fed should be slow to use what little ammo they currently have. 

“With the markets pushing record highs, recent employment and regional manufacturing surveys showing improvement, and retail sales rebounding, it certainly suggests the Fed should remain patient on cutting rates for now at least until more data becomes available.Patience would also seem logical given the limited room to lower rates before returning to the ‘zero bound.’”

Not surprisingly, Chairman Powell’s comments did not sit well with President Trump who has frequently pressed the Fed to cut rates aggressively. Mr. Powell stopped short of promising any specific monetary-policy easing, saying instead the central bank would “act as appropriate.”

After Powell’s closely watched speech in Jackson Hole, Trump tweeted, ‘As usual, the Fed did NOTHING!’ 

After China announced more import tariffs on U.S. goods early Friday, Trump said he would respond Friday afternoon. The president also asked ‘who is our bigger enemy,’ Powell or Chinese President Xi Jinping.” – MarketWatch

By the end of the day on Friday both the U.S. and China had hiked tariffs on one another.

“China said it would increase existing tariffs by 5% to 10% on more than 5,000 U.S. products, including soybeans, oil, and aircraft. A 25% duty on American-made cars would also be reinstituted. The value of these products is estimated by the Chinese Commerce Ministry to total around $75 billion.

Trump responded after financial markets closed by saying he would raise current U.S. tariffs. A 10% duty on $300 billion in Chinese goods will be raised to 15% in September while a 25% tariff on $250 billion in imports would be increased to 30% in October.” – MarketWatch

The Investing Conundrum

The problem with managing money is that markets are now trading on “tweets" and headlines", more than fundamentals. This makes being either long, or short, particularly difficult. 

This was a point made earlier this week to our RIAPRO subscribers:

With the volatility seen in just the past two weeks, it is too difficult to trade short positions without being ‘whipsawed’ out of the holdings.

Trading Rule:

When you are ‘unsure’ about the best course of action, the best course of action is to ‘do nothing.’”

This is where we are currently. 

Over the past few months we have reiterated the importance of holding higher levels of cash, being long fixed income, and shifting risk exposures to more defensive positions. That strategy has continued to work well. 

  • We have remained devoid of small-cap, mid-cap, international and emerging market equities since early 2018 due to the impact of tariffs on these areas.
  • For the same reasons we have also reduced or eliminated exposures to industrials, materials, and energy
  • With the trade war ramping up, there is little reason to take on additional risk at the current time as our holdings in bonds, precious metals, utilities, staples, and real estate continue to do the heavy lifting. 
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