Outsider Q&A 7.26.19

Outsider Club’s Weekly Reader Question 

“Does it worry you there is 100% consensus the Fed will cut rates?”

— Daryl J.

NICK HODGE | Founder

As a contrarian, yes. It always makes me nervous when there’s total agreement. The oft-cited CME Fedwatch Tool now has a 100% probability there will be a rate cut at the FOMC meeting on July 31. 

Is this the inevitable conclusion of its decade-long show? I’d have to say so, though I don’t know how long the act is or if there will be an encore. And I indicated this much in my editorial to you this week, telling you I’ve begun trading in some of my longer-term index funds for cash. Not to be confused with the Chicken Schiffles of the world, I haven’t done any selling of retirement funds in my IRA in 10 years. 

There is rotation afoot, as we’ve been saying in these pages. Rate cut or not… the endgame is clear. A monetary reset event approaches. We’re just waiting for the Fed to take its bow.

JASON SIMPKINS | Editor

Yes. I’ve been pretty vocal about this.

Unemployment is the lowest it’s been in decades, the economy is growing, and inflation is right near 2%, which I’ve been told is the Fed’s “preferred target.” Furthermore, as I understand the central bank’s dual mandate, it’s to promote employment and manage inflation.

I understand there are some economic indicators pointing toward recession. I understand that President Trump’s tariff policies are negatively impacting the economy. And I understand that there’s still a lot of weakness abroad. But to me, that still doesn’t require a rate cut.

It’s not the Fed’s job to ensure that the market goes up in perpetuity. Nor is it the Fed’s job to manage the economy. This isn’t China. We have a free market that’s supposed to sort itself out. We don’t need a stable of unelected bureaucrats to micromanage growth.

The government is responsible for growth. It’s supposed to enable it with sound economic policy, sensible regulation, and a balanced budget. It’s NOT supposed to go crying to the Fed every time the market starts to quake.

Recessions and market dives, though unpleasant, are necessary. They weed out weakness. They establish boundaries for policy. And they expose flaws worthy of remedy. Try as we might, we’re never going to live in a world without them.

To the contrary, by delaying the inevitable and kicking the can down the road, we’re actually sowing the seeds for a much more painful crisis. And when that crisis comes, what tools will the Fed deploy to address it, having already exhausted its chief means of economic management?

I worry that this decade-long bull market birthed by generous Fed policy has created a “new normal” in which the central bank is called into action at any hint of trouble. It’s a mentality that’s distorting the very markets it seeks to save and breeding complacency.

So, yes, it worries me.

ADAM ENGLISH | Editor

If it truly just meant 100% for a single rate cut it wouldn’t worry me.

Instead it is 100% that the Fed will continue to do exactly what the market wants.

Even at all-time highs and sky-high valuations, the threat of a cyclical, almost natural slowdown has become an “all hands on deck” emergency.

As has been predicted for years, the Fed has not returned to anything close to a normal and healthy higher interest rate in spite of having a decade between rate cuts to do so.

There is precious little cushion for when an actual recession happens, let alone an economic emergency.

So, 100% sure of one rate cut? Not a big worry.

Everything that comes with it? How the Fed will likely be expected to go further or the markets will flip out. How the Fed is still sitting on trillions of debt. How it has few tools in its toolbox to fix anything that’s actually broken. How absolutely vulnerable we are because of it.

All of those come alongside that 100% consensus, and it is a scary list.

To learn more about our editors, visit our website. And keep an eye on your inbox for Adam’s (Tuesdays), Nick’s (Wednesdays), and Jason’s (Fridays) weekly articles.