Cutting Rates – Intellectual Reckoning
By Julien B. Booth
August 1, 2019
Good Afternoon:
Today, the Federal Reserve cut the Fed Funds rate. During this interest rate cycle, the maximum short term rate reached roughly 2.5% – for a brief time.
We have belabored this topic for several months, but the intellectual acceptance nets out: the Federal Reserve is a quasi-political institution subject to explicit/implicit manipulation and committed to maintaining elevated asset prices.
What does it all mean?
Lowering interest rates will:
-
Provide a short term boost to risk (stocks) assets;
-
Send already high bond prices higher (good for our bond, preferred positions);
-
Increase real estate pricing (good for our CRE positions);
-
Put downward pressure on US Dollar (cheapen our $US currency-inflates asset prices); and
- Reduce borrowing costs (further lifting asset prices).
The not so dirty secret is that we are losing the purchasing power of our currency; on the surface prices inflate – but the currency required for purchases increases in-kind.
The present and prospective politics are another matter entirely. Political expedience for both parties provides they spend, spend, spend (regardless if it’s for war weapons, free(?) educations, free(?) healthcare, etc.)
Everyone likes free(?) stuff it seems. The net effect of either party’s fiscal policy is a lower US Dollar.
This Fed cycle is the 4th of my 24-year career in finance. Generally, the others were precipitated by need, not convenience. Yet, we live and work in the present.
Ultimately, people that prefer to save are the ones penalized. No longer can one save and invest conservatively and expect a fair rate (without risk) of return on one’s savings.
I will abstain from addressing Negative interest rates at this time – hard to fathom that 43% of investment-grade bonds in Europe are trading with negative yields.
The race to the bottom has clearly started, however, many folks are still standing at the starting line. 1.50%-1.75% on the Ten Year US Treasury here we come.
Today we closed at 2.01% for 10-year tenor US Treasuries.
We are tasked with managing risk for our clients. We take this risk quite seriously and are positioned accordingly. Bonds, preferreds, real estate, and a Gold related hedge, are our primary mechanisms in the current environment.
Risk-adjusted returns have been fantastic YTD.
For more information, please see our note, God Did Not Create the Federal Reserve: https://www.brcwm.com/2019/07/10/god-did-not-create-the-federal-reserve/
Thank you for your interest in Forest Capital and SGResearch.
JBB
