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At the Money: How To Know When The Fed Will Cut · Masters in Business

• 0:05
  Speaker 1: Beautiful God.
• 0:12
  Speaker 2: Over the past few years, it seems as if markets
• 0:15
  Speaker 2: have been obsessed with Federal Reserve action, first the rate
• 0:20
  Speaker 2: hiking cycle and now quote unquote the inevitable rate cuts.
• 0:25
  Speaker 2: Investors might find it useful to know when is the
• 0:28
  Speaker 2: FED going to start a new cycle of cutting rates.
• 0:32
  Speaker 2: As it turns out, there's specific data you should be
• 0:35
  Speaker 2: looking at to know when that cycle might begin. I'm
• 0:39
  Speaker 2: Barry Ridhelts, and on today's edition of At the Money,
• 0:43
  Speaker 2: we're going to discuss how you can tell when the
• 0:46
  Speaker 2: Fed is going to start cutting rates. To help us
• 0:49
  Speaker 2: unpack all of this and what it means for your portfolio,
• 0:53
  Speaker 2: let's bring in Jim Bianco, chief strategist at Bianco Research.
• 0:57
  Speaker 2: His firm has been providing objective, an unconventional research and
• 1:02
  Speaker 2: commentary to portfolio managers since nineteen ninety and it's top
• 1:07
  Speaker 2: rated amongst institutional traders. So Jim, let's just start with
• 1:11
  Speaker 2: the basics. How significant are rate cuts or hikes to
• 1:17
  Speaker 2: the typical market cycle?
• 1:18
  Speaker 3: How much do they really matter?
• 1:20
  Speaker 1: Thanks for having me, Berry, and the answer is they
• 1:22
  Speaker 1: matter more now than they have, say, over the last
• 1:24
  Speaker 1: fifteen years, for a very simple reason. There is a
• 1:28
  Speaker 1: yield again in the bond market. And as my friend
• 1:31
  Speaker 1: Jim Grant likes to say, who writes the newsletter, Grant's
• 1:34
  Speaker 1: Interest Rate Observer, it's nice to have an interest rate
• 1:37
  Speaker 1: to observe again, And because of that, we've got a
• 1:41
  Speaker 1: whole different dynamic. Well, in twenty nineteen, when your average
• 1:46
  Speaker 1: money market fund was yielding zero and your average bond
• 1:49
  Speaker 1: fund was yielding two percent, we used to scream, Tina,
• 1:52
  Speaker 1: there is no alternative. You can't sit there in a
• 1:54
  Speaker 1: zero money market fund. You got to move up the
• 1:56
  Speaker 1: risk curve to stocks, and you've got to, you know,
• 1:59
  Speaker 1: try and get some kind of reward from it. Well,
• 2:01
  Speaker 1: in twenty twenty four, now a money market fund is
• 2:04
  Speaker 1: yielding five point three percent and a bond fund is
• 2:07
  Speaker 1: yielding around four point eight to five percent. Well, that's
• 2:12
  Speaker 1: two thirds of what you can expect out of the
• 2:14
  Speaker 1: stock market. And especially if we wanted to stick with
• 2:17
  Speaker 1: a money market fund and virtually no market risk, because
• 2:20
  Speaker 1: it has an neev of one dollar every day, and
• 2:23
  Speaker 1: there's a fair number of people will say seventy percent,
• 2:26
  Speaker 1: two thirds of the stock market without any risk at
• 2:29
  Speaker 1: all market risk, that is sign me up for that.
• 2:32
  Speaker 2: So let's talk about raising and lowering rates. I have
• 2:36
  Speaker 2: to go back to twenty twenty two when the Fed
• 2:40
  Speaker 2: began their rate hiking cycle. It seems like a lot
• 2:44
  Speaker 2: of investors were blindsided by what was arguably the most
• 2:49
  Speaker 2: aggressive tightening cycle since since Paul Volker five hundred and
• 2:54
  Speaker 2: twenty five basis points in about eighteen months. Why, given
• 2:58
  Speaker 2: what had happened with CPI inflation spiking, why were investors
• 3:03
  Speaker 2: so blindsided by that.
• 3:05
  Speaker 1: They had gone forty years without seeing inflation and they
• 3:09
  Speaker 1: couldn't believe that inflation was going to return. And the
• 3:12
  Speaker 1: typical economist actually was arguing that there is no more
• 3:17
  Speaker 1: inflation again. And I might add to this day, the
• 3:20
  Speaker 1: typical economist still argues that we don't have inflation.
• 3:25
  Speaker 3: Now.
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  Speaker 1: I'm fond of saying that the term two things could
• 3:28
  Speaker 1: be true at once. And what you saw in twenty
• 3:30
  Speaker 1: twenty two, twenty twenty one, and twenty two two is
• 3:34
  Speaker 1: transitory inflation that got us to nine percent on CPI.
• 3:39
  Speaker 1: But once that transitory element of nine percent is settled out,
• 3:45
  Speaker 1: what I believe we're starting to see more and more
• 3:47
  Speaker 1: of is there is a new underlying higher inflation level.
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  Speaker 1: It is not two percent, It is more like three
• 3:54
  Speaker 1: to four percent inflation, not as I like to say,
• 3:56
  Speaker 1: it's not eight ten or Zimbabwe. It's three to four percent.
• 4:00
  Speaker 1: And that three to four percent is what's got the
• 4:03
  Speaker 1: Fed slow in cutting rates. It's got people debating whether
• 4:08
  Speaker 1: or not interest rates should come down more or go
• 4:11
  Speaker 1: up more. So, yes, we had transitory inflation because of
• 4:15
  Speaker 1: the lockdowns and the supply train constraints, and that has
• 4:18
  Speaker 1: gone away, but left in its wake is a higher
• 4:23
  Speaker 1: level of inflation, and that is the debate that we're
• 4:26
  Speaker 1: having right now. And if we have a higher level
• 4:28
  Speaker 1: of inflation, that is going to weigh heavily on monetary policy.
• 4:33
  Speaker 3: He hadn't done them any good.
• 4:35
  Speaker 2: So in the mid nineties, where were rates? How high
• 4:38
  Speaker 2: had they gone up? And then how much lower had
• 4:41
  Speaker 2: the Fed taken them?
• 4:43
  Speaker 1: So they were at six percent at their peak in
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  Speaker 1: late nineteen ninety four, and the Fed started to cut
• 4:49
  Speaker 1: rates and then they eventually wound up a cutting them
• 4:53
  Speaker 1: all the way down to three percent. At that point,
• 4:55
  Speaker 1: we thought that three percent was a microscopically low interest rate.
• 5:00
  Speaker 1: We know what we were in star Forth over the
• 5:01
  Speaker 1: next twenty years, So those rates were not very different
• 5:06
  Speaker 1: than the rates that we're seeing today with the FED
• 5:08
  Speaker 1: being a five to five and a quarter and with
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  Speaker 1: the bond with the yield and the ten year Treasury
• 5:12
  Speaker 1: at around four fifteen to four twenty, so we're kind
• 5:15
  Speaker 1: of in the same range that we've seen that.
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  Speaker 2: So if I'm an investor and I want to know
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  Speaker 2: the best data series to track and the levels to
• 5:26
  Speaker 2: pay attention to, that are going to give me a
• 5:29
  Speaker 2: heads up that, hey, the FED is really going to
• 5:32
  Speaker 2: start cutting rates. Now what should I be looking at
• 5:35
  Speaker 2: and what are the levels that suggest? Okay, now the
• 5:39
  Speaker 2: FED is going to be comfortable, maybe not cutting them
• 5:42
  Speaker 2: in half the way they did in the mid nineties,
• 5:44
  Speaker 2: but certainly taking rates from five to five and a
• 5:47
  Speaker 2: quarter down to four to four and a quarter four
• 5:50
  Speaker 2: and a half something like that.
• 5:52
  Speaker 1: So one forward looking measure and one kind of backward
• 5:55
  Speaker 1: looking measure that matters for the FED. The forward looking
• 5:57
  Speaker 1: measure is going to be probably the labor market. What
• 6:00
  Speaker 1: the FED is most concerned about is higher interest rates.
• 6:03
  Speaker 1: Are they going to weigh on business borrowing costs and
• 6:07
  Speaker 1: reduce their propensity or willingness to continue to hire workers.
• 6:11
  Speaker 1: So let's look at the initial claims for unemployment insurance.
• 6:14
  Speaker 1: It's a number that's put out every Thursday for the
• 6:17
  Speaker 1: previous week initial claims. Everybody has unemployment insurance. It's a
• 6:22
  Speaker 1: state program BUERAFU label. Statistic just aggregates to fifty states
• 6:26
  Speaker 1: and puts out that number on a seasonally adjusted basis.
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  Speaker 1: It's in the low two hundred thousands right now. That
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  Speaker 1: is over the last fifty years, an extraordinarily low number,
• 6:35
  Speaker 1: you start to and so if it goes up to
• 6:37
  Speaker 1: two twenty five or two forty, it's still a low number.
• 6:40
  Speaker 1: I think if you start seeing it, you know, start
• 6:43
  Speaker 1: pushing two seventy five or above three hundred thousand, are
• 6:47
  Speaker 1: that means new recipients for unemployment insurance that week? Then
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  Speaker 1: I start thinking that, you know, there is a real
• 6:55
  Speaker 1: problem starting to brew in the labor market. The Fed
• 6:57
  Speaker 1: will see that too, and the propensity for them to
• 7:00
  Speaker 1: cut will grow. And I want to emphasize here two
• 7:03
  Speaker 1: hundred thousand on Wall Street tends to kind of get
• 7:06
  Speaker 1: themselves myopic. Here, Oh, it went from two hundred thousand
• 7:09
  Speaker 1: to two hundred and twenty five, two hundred and thirty thousand.
• 7:12
  Speaker 3: The labor market is weakening.
• 7:14
  Speaker 1: No, that's all noise down near the lowest numbers that
• 7:16
  Speaker 1: we've ever seen in fifty years. It's got to do
• 7:18
  Speaker 1: something more significant than that.
• 7:20
  Speaker 2: What's the best inflation data to track that? You know,
• 7:24
  Speaker 2: Jerome Powell is paying attention to.
• 7:26
  Speaker 1: So Pow likes this obtuse number. He likes it because
• 7:30
  Speaker 1: he made it up called cores supercore. So it's it's
• 7:35
  Speaker 1: it's inflation less house excuse me, less food, less energy,
• 7:40
  Speaker 1: and less housing services. Now before you roll your eyes
• 7:43
  Speaker 1: and go, so you're talking about inflation provided I don't eat,
• 7:47
  Speaker 1: I don't drive, and I don't live anywhere. Inflation ex
• 7:50
  Speaker 1: inflation right right, what's left over is driven by wages.
• 7:55
  Speaker 1: And why he looks at that is he's trying to say,
• 7:58
  Speaker 1: are we seeing a wage spiral?
• 8:00
  Speaker 3: Now? Why is a wage spiral important?
• 8:03
  Speaker 1: No one is against anybody getting a raise, But the
• 8:06
  Speaker 1: fact is, if everybody is getting a four percent raise,
• 8:10
  Speaker 1: you can afford three to four percent inflation. If everybody's
• 8:14
  Speaker 1: getting a five percent raise, you can afford four percent inflation.
• 8:18
  Speaker 1: And that's what they're most concerned about, is getting that
• 8:20
  Speaker 1: inflation spiral going with a wage spiral. So they look
• 8:24
  Speaker 1: at the super core number as a way to say, yes,
• 8:27
  Speaker 1: we understand that there's housing. We understand that there's driving,
• 8:30
  Speaker 1: we understand that there's eating, and there's inflation in those three.
• 8:33
  Speaker 1: But we also understand that there's way inflation in wages.
• 8:37
  Speaker 1: And that's what they're trying to do is look at wages,
• 8:40
  Speaker 1: and so that's probably the best measure to look at.
• 8:42
  Speaker 2: So I know what a data wonk and a market
• 8:45
  Speaker 2: historian you are, but I suspect a lot of investors,
• 8:50
  Speaker 2: a lot of listeners, may not know what happens to
• 8:55
  Speaker 2: the bond market and the equity market once the Fed
• 8:58
  Speaker 2: finally begins cutting rates.
• 9:02
  Speaker 1: It depends on why, because there's two scenarios in there.
• 9:07
  Speaker 1: If the Fed starts cutting rates like it did in
• 9:10
  Speaker 1: twenty twenty, or like it did in two thousand and eight,
• 9:14
  Speaker 1: or like it did even in two thousand and one,
• 9:17
  Speaker 1: and it's a panic, Oh my god, the economy is
• 9:20
  Speaker 1: falling apart. People are losing their jobs. We've got to
• 9:23
  Speaker 1: start to stimulate the economy. We have to stop a recession.
• 9:28
  Speaker 1: If they're cutting rates because of a panic, it doesn't work.
• 9:32
  Speaker 1: We had recessions every time they started doing that, last
• 9:35
  Speaker 1: one being twenty twenty when they saw what was happening
• 9:38
  Speaker 1: with COVID, and because it is projecting a recession, which
• 9:43
  Speaker 1: means less economic activity, lower earnings. It's usually a difficult
• 9:48
  Speaker 1: period for risk markets like the stock market or real
• 9:51
  Speaker 1: estate prices and the like. If the Fed is cutting
• 9:54
  Speaker 1: rates like they did in nineteen ninety five or like
• 9:58
  Speaker 1: they did in twenty nineteen, it's kind of a victory lap.
• 10:01
  Speaker 3: We did it.
• 10:02
  Speaker 1: We stopped the bad stuff from happening, our magic tool
• 10:05
  Speaker 1: of interest rates, accomplished everything that we need. Now we
• 10:08
  Speaker 1: don't need a restrictive rate anymore, and they back off
• 10:13
  Speaker 1: of that restrictive rate. Well ninety five and twenty nineteen,
• 10:17
  Speaker 1: risk markets took off. Now twenty nineteen was short lived
• 10:20
  Speaker 1: because then COVID gotten away, and that was an exogenous
• 10:23
  Speaker 1: event that was not financially related. But they were going
• 10:27
  Speaker 1: right up until the moment that COVID hit. So why
• 10:31
  Speaker 1: is the Fed cutting rates? It really matters more than
• 10:35
  Speaker 1: when will they cut rates? And right now what everybody's
• 10:39
  Speaker 1: hoping for is the why will be a victory lap.
• 10:43
  Speaker 1: We did it, We stopped that bad old inflation. It's
• 10:46
  Speaker 1: gotten back to our two percent target. We could go
• 10:48
  Speaker 1: back to the way we were pre pandemic. And then
• 10:52
  Speaker 1: once we're there. We could now start to back off
• 10:55
  Speaker 1: of this restrictive rate and everybody will celebrate that. Yay,
• 10:59
  Speaker 1: we're getting into straight relief without it being a signal
• 11:02
  Speaker 1: that the economy is falling.
• 11:04
  Speaker 2: So to wrap up, investors hoping for rate cuts should
• 11:08
  Speaker 2: be aware that sometimes there's a positive response when it's
• 11:13
  Speaker 2: a victory lap. Sometimes when it's revealing the economy is
• 11:18
  Speaker 2: softening or a recession is coming, tends not to be
• 11:21
  Speaker 2: good for stocks. Volatility tends to increase. It's a classic
• 11:26
  Speaker 2: case of be careful what you wish for. But if
• 11:29
  Speaker 2: you want to know what the Fed is going to do,
• 11:31
  Speaker 2: you should keep track of initial unemployment claims. When they
• 11:35
  Speaker 2: get up towards three hundred thousand per week, that's a
• 11:38
  Speaker 2: warning sign. And follow Chairman Pal's super core Inflation, where
• 11:44
  Speaker 2: he's looking at the rate of wage increases to determine
• 11:47
  Speaker 2: when the Fed begins its newest rate cutting cycle. I'm
• 11:52
  Speaker 2: Barry Retults and you've been listening to Bloomberg's at the Money, got.
• 12:01
  Speaker 3: Head. I know the first kind is the gems.
• 12:08
  Speaker 1: And it counts up bigger lucky, She's goose.
• 12:13
  Speaker 3: Then it comes laughing, she's worse.