It has been some time since we experienced a wholesale panic in the markets such as occurred yesterday. Panics are irrational, emotional, painful and often short lived.
There is no doubt in my mind that this panic is all about Federal Reserve interest rate policy. President Trump said “I think the Fed is making a mistake. They are so tight. I think the Fed has gone crazy.” The President should have chosen a better term than crazy (or as he also referred to the Fed as loco) but his sentiment is 110% correct.
My colleague James Cramer said CNBC said “I am sick and tired of a Fed that reverts to a non-rigorous, non-homework-oriented approach every time things look good,” he lamented. “It’s like they unlearned all the lessons of the Great Recession.”
President Trump and James Cramer both understand economics and real estate and they see the same traps that the Fed is stepping into; although those two gentlemen voice it in different ways. I wholeheartedly agree with them.
The Fed under Paul Volker may have successfully broken the back of inflation forty some odd years ago. However, about twelve years ago, the Fed broke the economy and nearly sent us into a depression with their reckless tightening. A more disciplined approach to hiking interest rates may have avoided the Financial Crisis and Great Recession of a decade ago.
President Trump, James Cramer and I see the dangers of academic and dogmatic approaches to monetary policy. I also do not agree with the majority view that the Fed should be totally independent. Its independence has gotten itself into trouble before and I hope not so again. It should be co-dependent with fiscal and tax policy of the nation. In fact, the Fed should report, in a dual fashion; to its own board and one other branch of government – either Congress or the Executive, with my preference to the latter.
The investment world closely watches something called the Dot Plot. The Dot Plot is a graphical representation of Fed member interest rate projections. It currently depicts expectations of another ¼% tightening this year and ¾% next year. Though, there is a wide dispersion of next year’s expectations.
The Fed members need to soften their tightening expectations less they risk sending this economy, which is humming along at a 4% plus rate into a recession.
We have a saying on Wall Street to not fight the Fed. The fight may have begun but I hope that the Fed learned its lessons from the past and lays its gloves down.
More specifically, we need three things to occur for the panic and correction to end: 1) Fed Chair Jay Powell and voting members of the Fed should publicly lower their Dot Plot expectations for this year and next; 2) Some resolution, as minor as it may be, of the trade spat with China needs to happen; and, 3) Crude oil prices need to revert to a longer-term mean price of between $65 and $70 per barrel.
I might trim some positions to raise some cash and generate some realized losses, though we have very few positions which we are holding at a loss. Otherwise, I think we just wait out this panic and correction as we have done for others in the past – recall the volatility scare earlier this year, the China market scare in January 2016, the Ebola scare in October 2014, the Taper Tantrum of 2013 and of course the US Government downgrade of 2011. Ask yourself, are we better or worse off for not having panicked in 2011, 2013, 2014, 2016 and earlier this year? We must make sure that the Fed is not going crazy and acting as stupid as they did in 2005-07. If they insist on doing so, I need to make wholesale decisions to the portfolios.
Finally, understand that global market sell-offs or panics typically end in the US and do so after a lower opening in the morning. So, I will be looking for those tell-tale signs.
Disclosure: At the time of this commentary Scott Rothbort, his family and/or clients of LakeView AssetManagement, LLC had no positions in stocks mentioned — although positions can change at any time.
Scott Rothbort is the President & Founder of LakeView Asset Management, LLC, a registered investment advisor specializing in high net worth private wealth management. For more information on investing with LakeView Asset Management, LLC call us at 888-9LAKEVIEW or request more information by clicking on the contact button on the top right-hand corner of the website. LakeView Management, LLC is a Nevada LLC, with its principal office located in Henderson, NV and branch office located in Millburn, NJ
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