In May 2009, a field of 19 horses took to the track at the Kentucky Derby. Friesan Fire, who had come off three consecutive and impressive wins in the previous four months, was the runaway favorite. He placed 18th. Bettors who were certain of the outcome were left tearing up losing tickets and cursing the horse.
Just about a month from now, I expect we’re gonna hear a lot more cursing from the bettors.
This time it won’t be a horse that stirs their ire, but a Federal Reserve meeting.
See, Wall Street sees a 75% chance that the Fed will finally raise interest rates in September. It would be the first such rate hike in nearly a decade. The Fed for the last few years has been alluding to the likelihood that a rate hike is coming at some point, and Fed Chair Janet Yellen has said it could be before the end of the year — assuming the economic data indicate the economy is on stable footing.
My bet is that the bettors are wrong.
The Fed won’t raise rates next month. And it might not raise them this year.
Unless you, too, are a gambler, there’s no safe way to play the Fed’s September meeting.
If the Fed does act, then the dollar rallies strongly, while gold and commodities fall. Bonds fall. The stock market — well, that’s a guess at best.
If the Fed, as I suspect, does not act, the dollar falls, while gold and commodities rally. Bonds rally. The stock market — well, that’s a guess at best.
Thus, today’s dispatch isn’t aimed at telling you how to invest based on what the Fed is likely to do. It’s to prepare you for what the Fed’s action — or in this case, non-action — means in the bigger scheme of your financial life.
The Overlooked Value of Silence
The Street’s problem is that it’s myopic — too focused on reacting to each little piece of news that comes out. It’s not taking a holistic view of the world in which the Fed’s actions will reverberate.
The probability of a rate hike soared to 75% from 55% in just two days because the July non-farm payroll report — the so-called jobs report — showed that our economy added 215,000 jobs (never mind that more than half were in low-wage, low-skill industries such as leisure, hospitality, retail and health care services).
This is, of course, all the Fed’s fault. It has done such a lousy job of communication that the markets are acting and reacting to every burp and sniffle. Each Fed governor is a loose cannon, one saying one thing, another saying something else. And official “Fed speak” offers up the same commentary over and over again, even though the governors’ language often doesn’t match. Worse, the commentary is so ambiguous that one could argue that the Fed either is or is not following its own guidance.
Instead of talking, the Fed should just be dead silent. It should act in a vacuum. If it shocks the market, so be it. The market’s reaction would be no different than today, really. But there would be a huge benefit to the silence: less global tension.
The Fed’s Mess
Every time a Fed governor speaks, markets around the world move, up or down, based on the commentary.
That’s entirely unfair to investors.
Investment decisions should stand or fall based on the merits of the investment … not the musings of Federal Reserve governors whose words historically have provided little insight into what the Fed will do or when it will actually do it.
The Fed’s hawkish members have been calling for rate hikes for months. And the Fed’s official commentary is that it will raise rates likely this year. But the underlying global reality contravenes that likelihood.
U.S. interest rates do not exist in a vacuum. Raise rates here at home, and economies the world over will react, and not in a good way. Currencies will react in ways that hurt the U.S. economy and the workforce that the Fed is desperate to protect.
Yes, there are also ramifications from not acting. The Fed could fall behind (and likely already has fallen behind) the curve in managing inflation. But at this point in the game, we’re all caught between two evils because of the hideous job that Western politicians and central bankers around the world have done over the last two decades in managing economies, government spending, moral risk, currencies, welfare giveaways — you name it, they’ve pretty much made a hash of it.
And now the Fed is trying to talk its way out of the problem … but when everyone in the Fed is singing from a different hymnal, what chance do we really have? Whatever choice they choose will cause disruptions and dislocations.
It’s why every paper asset class, as well as real estate, faces the certainty of a decline. The Fed cannot play both sides of this fence and navigate an uneventful conclusion.
Take Some Money off the Table
There will be blood, no matter the path.
Sell down some of your paper assets. Not everything, of course, but take profits where you can and sit in cash until we have a clearer picture of the Fed’s course.
Now is not the moment to bet on the favorite. Because the favorite isn’t likely to come in.