Was the Fed Rate Cut a Bad Decision? (w/Michael Gayed)

Was the Fed Rate Cut a Bad Decision? (w/Michael Gayed)


Welcome to trade ideas I’m Jake Merle sitting down with Michael guide portfolio manager at pension partners and author of the lead lag report Michael great to have you back on the show always a pleasure. Thank you So we just saw the first rate cut in over a decade Yesterday we just had the FOMC meeting. I know you watch the Fed extremely closely. What did you make of the meeting? Yeah, I mean some people call it a recut I think actually was more of a rate hike why is that? When you look at now look all these has the copy I said that it’s just an initial reaction but if you look at the way the markets behaved when the Fed cut by 25 basis points Treasuries are long and price rallied yields dropped significant flight nning Dollar spiked stocks broke down you had some minimal Maybe just starting credit spread widening All those are symptomatic of a of a hike of a reduction of liquidity not an increase in liquidity And if the dollar which I maintain is kind of the key thing for any central bank as their currency All right, if the dollar does continue to keep appreciating That undoes any kind of recut that they’re trying to do to me. It’s very bothersome The the I think the arrogance the central banks have whether it’s a Fed the ECB or any other central bank in Terms of trying to use tools that clearly are not creating the inflation They’ve been hoping would be transient for as long as they’ve been saying that has been And I think the issue with the Fed here is that they are gonna be constantly gonna be having to play catch down I suppose catch up catch down to the long end With this Yoker flattening such that they cut rates but then the long and it should goes down at a faster pace suggesting Disinflation is gonna be even more severe. So I think in some ways the the cut was a mistake So what should they have done instead? So, okay This is a game of psychology, right? One of the reasons you really haven’t had inflation is not because of the money supplies because of the velocity of money Right the speed which people are transacting You don’t get that unless you get Aaron C I think in many ways You you only get urgency if you get people thinking that rates are gonna keep rising he was so it seems counterintuitive But you could actually get inflation if you scare the public into thinking that low cost of capital is not gonna be here forever Now what increases lost some money increasing increased inflation and then perversely, you know Cause a lot of these concerns to disappear right with actually hiking rates In many ways when it comes to markets, what’s the most important thing is not policy it’s behavioral changes The market likes to have the illusion of certainty about an unknowable future You don’t give the illusion of certainty by saying well, we’re gonna cut 25 basis points It’s gonna be one and done and we’re not sure we’re gonna be doing better to say we’re either not going to do anything We’re gonna keep rates as they are boots were confident and still at confidence in market participants or say You know what? We are confidently we’re confident we’re gonna do everything we can to cause the yield curve to Actually Stephen and we’re to go ultra aggressive cutting short rates to stop this trend But to go in the middle and to be wishy-washy the way it seems as I like to go on papa Powell From the Fed has done. I think it’s a Very very bad judgment call on the feds part So you’re not worried at all about slowing growth and you know upcoming recession recessions are healthy I’ve made this point on Twitter on on the ad lag report given all this Democratic debates and Politics season coming in here the the best candidate whether it’s for Fed chair or for a presidential spot Is the one that recognizes and says to the American people we have to suffer now To have a better future later The US government has 22 trillion dollars of debt Stopped all conversation 22 trillion dollars of debt the Fed continues to enable ongoing borrowing by lowering rates so there’s never any discipline on a spending side from the fiscal end of things and You’re gonna have a recession no matter what or at least very poor future growth because at some point that debt has to be paid By the taxpayer or inflation the feds not getting inflation. Good luck trying to get voted in on taxes So so I don’t fear a recession now, I fear a depression later So in terms of playing the current market environment, how do you suggest traders play the setup? I think it’s very tough. Right in the sense that obviously you’re not just combat Rates here combating rates overseas and we may have to see what the ECB ultimate is gonna be doing on That and how that impacts European credit markets as well. I think this is an extraordinarily difficult juncture for all asset allocators I really do I’ve maintained that you’re probably more likely to have the reflation theme I still think that’s more likely than not even though we’re seeing the dollar spike because I think the dollars enormous ly overbought now having said that Overbought can see overbought for a long time, right? That’s why I’m saying this is very tricky I think that dollar strength has surprised a lot of people and that’s what markets tend to do Alright, this is all about probabilities And I think if the dollar does continue to go higher the Federal probably will have to do a panic move Or there’s gonna be some degree of quote-unquote intervention Even if it’s just words and I’m sure you’re gonna see tweets from Trump on that end So I still think you’re the reflation theme in there I think if anything it We’re gonna be entering a juncture a cycle where what’s gonna matter the most is those investments tied to discipline as opposed to? Gut reaction or feeling on data that does not predict the future so what I mean by that is I think you’re entering a juncture where you’re gonna have a degree of Debate around whether the Fiat system as it is now the central bank’s Removal of they’re tying to the gold standard was ultimately the right move from a very long-term perspective I’m not a Gold Bug by any means but I think gold is very much a sign of discipline or as a tool for discipline when it comes to policy makers and Clearly there’s no discipline, but from the Fed or from the government in terms of spending So for anybody that’s saying well, what should I invest in for the next 10 15 years? I would I would suspect that gold probably is an interesting play right because you may have Potentially a shift towards a more sane Policy now if you don’t this 22 trillions also does I keep going back to this debt is the problem I don’t know how in the world we’re gonna get out of this So you mentioned, you know, 10 or 15 years for the time pryzen for gold. But what about over the next three months? How should we you know position right now? So it’s always important to recognize where you were on the presidential cycle, right? So the third year of the presidential cycle tends to be a pretty strong one Obviously markers have been incredibly at least in the u.s small caps have not been as strong and I Always rant on that point when people say the market is at new all-time highs stop Don’t say the market because the market is not the sp500 Right when you look at a lot of equal weight indices when you have more breadth, you’re not really doing as well as you think Especially when you look at International So I think you still are okay in the towards the end of the year for risk assets the caveat to the the pre-election year cycle being the strongest in the four year presidential cycle is that 1987 was a pre-election year as well and the Dow was up 30% before the crash I don’t think that the necessary gonna be the case here, but I think it’s still okay to take on risk I think reflation still makes more sense if anything just as an oversold bounce on reflation trades But again, I want to caution any way that’s looking at US markets you have to keep in the back here mind this issue of Equities going up because we’re taking on so much debt and you can say that that doesn’t matter but there’s a point where debt creates significant divergences in wealth, which is what we’ve seen for the last several years significant divergences in How one should behave in a in a sort of more logical environment and markets are very good at surprising people It took 2008 to take away ten years of gains Through these two weeks in 2008 Nothing is for certain when it comes to returns and so by reflation trade I know you’ve mentioned it a few times in some previous interviews. You’re talking about a weaker dollar, you know long emerging markets Can you explain that a little more please? Yeah, so look at the When the dollar one? Appreciates, right? That’s it. That’s a deflationary force. All right, when the dollar depreciates that’s an inflationary force Okay, so generally emerging markets financials anything beneficial course deepening or from commodity cost push inflation Will correlate to a weaker dollar now given that the dollar isn’t so strong question is do you want to keep on betting on that trend a disinflation are trying to Or are you in a bet that that’s gonna reverse and have some kind of a meaningful correction? Which in turn should probably lift all the reef legionary trades right anything that would benefit off of the inflation premium Rising. So again, I just from a contrarian standpoint. I look at the dollar I say my it’s probably way too strong than it should be and I suspect that the powers that be will probably try and Bring it down And if that’s the case if you want to bet on the stuff That would be most correlated to that weaker dollar again emerging markets financials Commodities all those areas which have fail to participate exactly because the dollar has been so strong until last time you were here I know you Recommended going long emerging markets against the SP. You’re looking for a 20% out performance. Would you still be recommending that trade? Yeah, I don’t think I think it’s changed on that. I mean just short-term again We don’t know what the reaction it’ll be later on I mean people tend to have this knee-jerk response to central bank actions the day up and they think that’s the way it’s gonna be for the next few months We don’t know how markets yet are gonna play out But I think still you know, if you like buy low sell high, I don’t know Why in hell you’d want to buy the S&P? Well, Michael, we’ll see how it plays out in the months to come Thanks so much for joining us So Michael still likes the reflection trade he thinks the MSCI Emerging Markets ETF could outperform the S&P 500 by 20% over the next few months that Was Michael Guyot of pension partners and for real vision? I’m Jake Morrell You

15 Comments

  • Na Na

    August 2, 2019

    I'm going to try and sound smart by saying a rate cut is actually a rate hike. Dumb. The market reacted the way it did because a rate cut is a sign of weakness. So people panicked. Nothing new there. Then trump added on more tariffs the next day so the market dropped again

    Reply
  • Coach Alpha Elite

    August 2, 2019

    Global market crash imminent, crisis, emergency. No one asks what happened to the balance sheet. Savings accounts etfs 401ks

    Reply
  • Stan Eversham

    August 2, 2019

    Hey Gayed, where is the market crash you have been predicting for the past few months? How is that lumber indicator working out? 🙂

    Reply
  • David Chorak

    August 2, 2019

    Another gold bug shaping all ideas to demonstrate everything points to gold. This guy is worse than the “milk shake” theory guy. Nothing of value here it’s all, minus nothing, imaginary gold visions. He’s mentally ill do to personality insecurities as all gold bugs. Cheers.

    Reply
  • The Macronical

    August 2, 2019

    3m-5y and 3m-10y have already been inverted long enough to where they indicate future recession. Cutting rates now will just let Main Street know the economy is bad, equity people figured this out after the rate cut.

    Reply
  • James Ruscheinski

    August 2, 2019

    Stronger currencies for greater import / export trade

    Reply
  • James Ruscheinski

    August 2, 2019

    Stronger currencies increase velocity of money with greater purchasing power

    Reply
  • Liberty Springs

    August 3, 2019

    I get the feeling the fed is just following the market rates and has to make up some narrative to match whatever direction that is.when they lower rates again, wont that eventually cause people to pull back out of money market funds and cause another crisis in money markets?

    Reply
  • waffle ninja

    August 3, 2019

    When the US market crashes, it's a global problem. Expecting emerging markets to do well in that environment is a sin of logic.

    Reply
  • Edward Kasimir

    August 3, 2019

    "Right?"

    Reply
  • J

    August 3, 2019

    Real Vision doesn't have nearly as many views at it should considering how awesome the content is. Keep it up guys I don't understand why this isn't a 1Mil plus channel.

    Reply
  • The O.K. Corral

    August 3, 2019

    Why are we cutting rates??

    The "elite" families KNOW that the GREATEST TRANSFER OF WEALTH will be going on for the next 5-7 years and they NEED TO STEAL as much of that as possible!

    How will they do that????? NEGATIVE INTEREST RATES is one way!!!!!!

    Reply
  • Mary Stuart

    August 3, 2019

    Zero interest rates.. They will break Seniors and savers…

    Reply
  • Jack Malloy

    August 4, 2019

    Actually investing in his fund is the bad decision. ATAC rotation fund, managed by Pension Partners, where Michael Gayed is a portfolio manager:
    5 year returns of 3.64% annualized, and a fee of 1.95% per year.

    Reply
  • Nitul Das

    August 5, 2019

    Recessions are healthy. Point.

    Reply

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