Credibility – March 2019
Last week the Fed announced that they would keep interest rates on hold through 2019.[1]
The announcement caught many investors by surprise. The financial markets do not like surprises .
What surprised me is how quickly the economic pundits changed their tune. Less than 3 months ago many were in favor of one or two more rate hikes based on their expectations for the economy.
This week the same pundits are calling for the Fed to cut rates. Pundits who can change their economic outlook from one data series to the next lack credibility.
The reason they lack credibility?
Changes in the economy do not happen overnight .The Fed has to stay “ahead of the curve”. The changes they make to interest rate policy today take many months to impact the economy of the future.
But the pundits have to say something otherwise 24-hour financial news would be boring.
What is typical today is to see constant “revisions” to an outlook.
For long term investors day to day revisions are contrary to good investing practices.
As recently as last December the Fed expected to increase rates two times in 2019.
For investors, believing that rates are going up changes their investment strategy
When the Fed changes course it means they have changed their outlook for the economy. A few of the reasons the Fed gave as to their change in policy:
- Growth in the US will be slower than expected.
- Retail Sales point to slower growth in consumer spending
- Business fixed investment growing at a slower pace
- No resolution on trade talks
- No resolution on Brexit
- Weakening Chinese economy
As a result, interest rates dropped significantly. If you own short term treasuries you saw an immediate increase in the value of your investments.
For example, the interest rate on the 2-year Treasury dropped from a high of 2.92%
last October to a low of 2.20% on March 27th.
During the last 6 months I made a few modest observations about the economy.
I believe that economics and investing go hand in hand. What happens in the economy is often the driver of investment decisions.
Lets take a quick look at some excerpts from previous newsletters.
Then let’s how I did and what I did.
Tariffs and Trade Offs – August 2018
Remember the cranberries?
In this newsletter I wrote about how tariffs can slow an economy. There is collateral damage to many industries small and large when we enter into a trade war. Between the US and China no one wins and the trade war becomes a race to the bottom.
It is kind of a no brainer prediction because about every economist on the planet has the same view.
For the year 2018 the trade deficit continued to widen. Now we are seeing signs of a slowdown in economic activity in both the US and China. The race to the bottom has begun.
Click here to view the newsletter from my archives.
Don’t Turn Out the Lights – October 2018
“My Modest Prediction:
Escalating Trade War + Rising interest Rates + Decline in corporate earnings =
a slowdown in the economy. Not today or tomorrow but first half of 2019.
Unless:
The Trade War ends (not likely), The Fed stops raising rates (more likely) and corporate earnings improve (it’s quarterly data so we won’t know right away).
What can you do with this information?
I think it is time to invest some, not all, of your cash in short term Treasuries” .
Click here to view the newsletter from my archives.
Artificial Inflation – November 2018
“Growth in our economy is driven by consumer spending.
If consumers stop or slow down their spending, what happens to the economy?
The economy starts to slow down.
Like the bubbles in the picture above, there are many moving parts to the economy.
Bursting the bubble of consumer spending is not the way to move the economy forward”
Click here to view the newsletter from my archives.
The New Moon Economy – February 2019
“As much as I love a good set of data , data alone is not enough to predict the next phase of the business cycle.
I have said for some months that I believe the economy is slowing.
Slowing does not mean a recession. Growth (GDP) could drop, from 3% to 2%, but that is not a recession . There are signs though.”
Click here to view the newsletter from my archives.
You don’t have to be “an economist” to notice what is happening in the world.
If you thought that the trade wars would be negative for the economy, you were right. You don’t have to come up with a detailed reason.
If you noticed that there was plenty of merchandise in the stores around the holidays and stores were not as crowded, you identified the slowdown in consumer spending.
A simple and accurate observation.
A downturn in corporate earnings led to a negative year for stock market returns.
I was a little surprised when I re-read my own newsletters. I haven’t changed my outlook on growth since last August.
Okay great, one for the team. I have been consistent.
The real value of “predictions” though is how you use the information to invest.
I took my own advice from October and invested some, not all, of my cash in 2-year Treasuries.
Despite my economic prognostications I bought Treasuries because we had not seen interest rates this high on short term bonds in a decade. If I was correct that growth would slow, we would see lower bond yields.
I am going to close with this thought. Expressing my views or opinions on the economy is not the same as holding me accountable.
If you base your investment decisions on the daily news you will euphemistically be “whipsawed” or “chasing your tail” in the investment world.
This website is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation for any security, nor does it constitute an offer to provide investment advisory or other services by The Modest Economist LLC.
