Focus on Fed policy and lower rates misses the point … in our strong economy we may not need to do this.

Freepik

— Those calling for more economic support from lower rates never mention continued expansionary fiscal policy (continued deficit spending) as an offset.

— Keynes had it right: you stimulate when you have headed into rough times and pull that stimulus out as the economy improves. Right now we don’t need to stimulate.

— No rate cut … No  big deal, unless you happen to be a high multiple, high expectation stock.

Hyper Fed Focus Continues

There is an ongoing narrative these days about how the Fed should be cutting rates soon, if not the market will suffer greatly … “The Fed’s rate decision will be front of mind for traders on Wednesday.” This appears to be based on an ill conceived notion that the Fed is the be-all and end-all of economic policy wisdom and that it has a prescription for keeping the market and economic charts on gradual up-sloping lines to the right. Yes, the Fed has tools to goose the economy but their dual mandate is rather narrow and conflicting (achieve maximum employment and keep prices stable) — too much stimulation, they achieve max. employment and you run the risk of setting off higher inflation. More importantly there is nothing in the mandate that indicates the Fed should act preemptively to ward off bad economic times … which, based on recent experience, are very difficult to predict.

We have been running with great employment statistics, lower-trending inflation and a Fed funds rate with a 5% handle for almost nine months. Many are shaking their heads because they don’t get that the market is being supported by a lack of fiscal restraint (deficit spending/printing money). This variable does not even appear to be on many investors’ radar screens. To paraphrase that late, gravely-voiced Republican senator from Illinois, Everett Dirksen, ‘A trillion here, a trillion there … pretty soon you’re talking about real money’.

In the lasts five years the United States has put almost $10 trillion on the credit card. Compare that to the $800 billion worth of bail out money the country floated in 2009 (much of which was completely paid back). In considering the magnitude of this number our total GDP in 2018 was just over $20 trillion.

Thanks to the multiplier effect the impact of this spending is not just one-and-done. It is money in the system in pockets of consumers and businesses. A business might invest that money in a new plant. It becomes income to builders, suppliers and workmen that will create more demand and so on and so forth.

Our tremendously expansionary fiscal policy seems to have more than offset the impact of higher rates. As such it would seem to oppose the negativity of those espousing a need for lower rates. Why stimulate that which is already stimulated? Although the current rate on Fed funds stands at 5.33%, the average Fed funds rate over the past 70 years has been 4.67%. Unfortunately, we all got used to emergency low rates. People cannot seem to get their heads around more normal levels of rates. The media’s obsession with the supposed need for Fed action has not improved the situation

As mentioned in the bullets earlier John Maynard Keynes, an English economist influential in the first half of the twentieth century, believed government could ease the pain of economic cycles by deficit spending into economic declines to stabilize the system. This was a theoretical template for the “New Deal” Roosevelt administration programs to bring the US economy out of the “Great Depression.” The idea was that this money would be taken out of circulation when good times returned. We managed to do that after WWII.

That was then. This is now. We can’t seem to discipline ourselves to moving those funds back to the sidelines as the bon temps rouler. This has been going on to some degree or another for most of my time in the business (50+ years) and, like the multitude of warnings that we have had in the past two years that a rate driven recession (or worse) was just around the corner, the debt disaster has also failed to materialize. Maybe this time it will. It is not my forecast.

In conclusion

Too many investors are expending too much time and energy trying to divine whether and when the Fed will begin to cut rates. Instead, they should be asking the question, ‘are rate cuts really necessary or advisable’? They should be spending the rest of their time selecting stocks and ETFs not fettered to the “magnificent seven,” i.e. the safe play in the tough economic times that we are not experiencing. In a strong economy with good earnings and liquidity available to a broad pallet of stocks a portfolio growth, interest-rate-sensitive, high multiple (high expectation) stocks isn’t going to be a recipe for success. This is especially true if rates remain high. 

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