Bursting the Fed’s Bubble

Here’s a major wisdom slap for the Fed. It’s about its recent announcement that there will be no more interest rate changes in 2019 and as few as two in 2020.

Did I miss a sale on crystal balls at Walmart?

When did it become possible to look forward in the market 21 months? That’s what it’s doing.

Look at the ups and downs we’ve seen for the past two years. I’m hesitant to make a day-to-day call, and the Fed comes out of its March meeting looking ahead by 21 months?

As they used to say in my hometown, what the hey?

This soothsayer-like announcement scares me on two levels. First, the stock heads of the world want to believe it. They want to believe the party can go on forever.

It can’t. That’s not how our system works.

You can’t have the kind of growth we’ve seen in almost every aspect of our economy for an unlimited amount of time with no interest rate increases. It doesn’t work that way.

And the fact that the stock heads don’t want to believe rates will go up doesn’t change a thing.

The second problem I’m having with the Fed is the weaknesses that are driving its dovish position are so obvious and temporary.

The declining growth numbers we’ve seen since the big 2018 boom are a function of three things: tariffs, lower-than-expected capital expenditure (capex) numbers and global growth.

What’s amazing to me is that no one seems to recognize that tariffs will go away when a deal is cut with China. That will eliminate most concerns about slowing global growth. And, consequently, that will encourage capital expenditures by U.S. corporations.

Bingo!

Let’s suppose I’m only half right and global growth only begins to improve. Not all, but most or some of the tariffs are eliminated, and capital expenditures increase only half of what I think they will.

That’s a very reasonable scenario – one that will spur more growth here at home.

When that happens, the 1 3/4 years guesstimate of no interest rate increases has to go out the window.

The Fed could be caught with its pants down behind the eight ball again. That’s the worst possible outcome. You don’t want the Fed playing catch-up ball.

This could be a repeat of 1994, when the Fed, playing catch-up, increased interest rates eight times in six months.

You think December was rough? Look at the first half of 1994.

No one, not even the Fed, can predict anything about this economy 21 months out. It’s nuts.

The Fed is wrong. Rates will follow the end of tariffs and improving global growth, and you have to be prepared for them.

Good investing,

Steve