Friday Haymaker
A word from Anatole Kaletsky (and a conversation with Trader Ferg)
Hello, Readers and Subscribers:
This week’s big financial news was obviously the Fed’s one-half-percent interest rate reduction. Normally, it prefers to move in one-quarter-percent increments. Consequently, the magnitude of this adjustment is raising some eyebrows.
There are those who believe this reflects the Fed’s concerns about the economy’s resilience. However, Gavekal co-founder Anatole Kaletsky, is not among them, as you will soon read. He strongly believes this rate cut, and the others which are assumed to follow, will forestall any recession in 2025 (and implicitly, that there is almost no chance one is presently underway).
Additionally, Anatole sees this as evidence the Fed is willing to tolerate higher inflation. Using the CPI, versus the Fed’s preferred Personal Consumption Expenditure Index (PCE), he feels somewhere around 3% is likely to be the inflation trough for this cycle. That is essentially the level the Fed is targeting for its neutral interest rate (where it is assumed to be neither restrictive nor stimulative).
If he’s right that inflation bottoms considerably higher than the Fed assumes, a real or (after inflation) “neutral” rate of zero definitely implies easy financial conditions. He reasonably feels this is extremely bond-market unfriendly.
Compounding that are the free-spending proposals being thrown around by both presidential candidates. Almost each passing day brings yet another idea to either increase spending or decrease tax revenues. The prospect of dual monetary and fiscal stimulus has significant implications, particularly for fixed-income investments.
We recently downgraded our assessment of long-term Treasury bonds and Anatole’s views are supportive of that stance. It continues to be our belief that it will be bond market convulsions which will be the ultimate reality check for politicians who clearly believe the U.S. can run astronomical deficits without any adverse consequences. History has repeatedly shown that there is a steep price to pay for such reckless policies.
Team Haymaker
P.S. Dave was quite happy to recently sit with financial/market writer Trader Ferg for an interview. Just after Anatole’s piece, our paid subscribers will see a video embed and a password for that podcast episode. Enjoy!
The Fed Rate Cut Is Bad For Bonds
Anatole Kaletsky (Originally published September 19th, 2024)
There are three clear medium-term implications from the Federal Reserve’s decision yesterday to “go big” with a 50bp rate cut. All three are bearish for the US bond market, with potential knock-on effects for other assets with valuations that depend on the unsustainably low yields now offered by long-term US bonds.