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The Asset Class: Philip Saunders · Strictly Business

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  You're listening to Strictly Business Podcast with Lindsay Williams.
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  The US Federal Reserve has cut interest rates by 25 basis points, a quarter of a
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  percent.
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  With me now, Philip Saunders, Director, Investment Institute at 91 in London.
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  It was widely expected, Philip, and it's been a gratifyingly sort of benign
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  reaction for most asset classes.
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  Yes, absolutely right, Lindsay.
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  It's very, very well telegraphed.
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  You know, there was some debate about whether or not they do 50.
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  That was, you know, basically there was no real justification for that.
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  So doing 25 basis points was pretty much what markets expected.
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  And so there's been relatively little reaction to that.
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  And they signaled that they're going to potentially cut another two times, take
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  rates down
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  75 basis points in total, probably by the end of the year or January.
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  So it's not really...
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  You know, that newsworthy, what is newsworthy, of course, is that if you look
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  at the forecasts,
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  the famous dot plots, they're all over the place.
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  So, you know, it was a unanimous verdict, apparently, 11 to 1, the one being Stephen
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  Mirren,
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  who's recently, he's Trump's appointee.
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  He was the Trump plant, wasn't he?
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  Interestingly, he was the only dissenter.
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  Why was that before you go on to the forecast being all over the place?
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  he's Right at the dovish end of expectations,
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  he believes that rates should be lower.
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  And if you look at his dot plots, basically they're the lowest of the entire
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  group.
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  And he believes that the impact of tariffs on inflation, which has been running at,
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  you know,
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  a sort of higher than comfortable level for some time now, you know,
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  it's running at around about core inflation running around about 3% in the
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  US.
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  So it's pretty unusual for the Fed to be cutting rates in those circumstances.
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  He believes that inflation is due to continue to fall, obviously,
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  and that he feels that the Fed's policy has been lagging that and the Fed have
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  been keeping interest rates
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  too high for too long.
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  OK, tell us about the forecast being all over the place.
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  Was that something to do with the Trump plant coming in or is it just a dissent
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  within the existing members?
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  So I think it's just there's a high degree of uncertainty about what they should
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  actually do.
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  And to be fair, it's, you know, we're still in this sort of post-COVID disrupted
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  world where,
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  you know, it's we're not looking at conventional cycles.
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  You know, some things appear to be late cycle, other things appear to be early
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  cycle.
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  And so, you know, economists Generally, there's not a particularly high degree of
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  agreement at the moment.
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  And that, in a way, is reflected in the individual members'
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  forecasts for both growth and inflation and interest rates, which, of course, they
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  publish.
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  If there's a bit of confusion amongst the Fed members, the FOMC members, Philip,
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  does it sort of reflect what's happening in the U.S.
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  economy?
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  In other words, a very sluggish jobs market, but quite feisty inflation.
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  given the economic circumstances.
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  Does that reflect in a broader opinion outside of the Fed?
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  Yeah, very much so.
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  And I think we've got these two particular schools of thought, what I call the
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  recessionists,
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  who believe that we're on the cusp of a recession and that actually the Fed should
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  be cutting much more
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  aggressively at the moment.
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  And this is a result, obviously, of tariffs and everything else.
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  And then you've got the other school of thought.
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  which is sort of the polar opposite of that, that effectively that the
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  unemployment stats or the employment stats are a
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  lagging indicator.
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  And actually, if anything, things are turning around and you're beginning to see
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  manufacturing,
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  which has been recession effectively for the last four years, beginning to improve.
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  Consumer spending is holding up and the labour market is sort of, you know, it's
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  obviously a lot weaker,
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  but the unemployment rate isn't sort of spiking up.
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  So they're sort of saying that...
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  Equity markets are right to be bulled up, whereas the former group are saying,
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  right, it's crazy.
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  Equity market participants have got this completely wrong.
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  And there's a significant risk of a drawdown.
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  No such problem, of course, at the Bank of England, who are going to be announcing
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  their decision a few hours after we finish this
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  podcast.
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  Philip, inflation rate in the United Kingdom, I think, is 3.8 percent.
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  Growth is virtually non-existent.
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  What do you think is going to happen?
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  Will they follow the Fed?
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  Not necessarily.
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  I think the Bank of England is an extremely difficult
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  position and inflation is really not at a level that would particularly justify, you
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  know,
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  cut in rates at this particular point in time.
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  And this really is sort of largely because inflation has been pushed up by government
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  policy.
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  And, you know, we've come from basically being below the European average over the
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  last couple of
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  years to being well above it
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  simply because of basically policy shifts that have tended to actually push
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  inflation up.
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  at this sort of sensitive time.
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  So the Bank of England have got a very difficult, and the Fed had a difficult
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  decision.
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  Bank of England had probably an even more difficult decision because, you know,
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  inflation,
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  at least you can make the arguments in the US that inflation is actually coming down.
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  You know, there are a lot of measures that are actually coming down.
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  Obviously, tariffs has pushed in the other direction.
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  The Fed is deeming it to be transitory, whereas in the UK,
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  what's been driving inflation is a bunch of different things.
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  So the inflation rate is too high in the UK, which means that it would probably be
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  unwise for the Bank of England to actually
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  reduce rates at this point.
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  What does this mean for the 91 strategy, given what happened last night in the
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  United States?
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  Steady as she goes?
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  Yeah, pretty much.
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  I mean, I think that, you know, we obviously are a broad church,
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  so people have different views across the investment team.
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  But I think, you know, in terms of portfolio positioning on the multi-asset
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  side at any rate,
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  We're in the sort of improving economic environment driven by, you know,
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  reducing interest rates internationally, weaker dollar, which has obviously helped
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  emerging markets significantly.
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  And we think that growth surprises heading into next year are probably going to be on
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  the side of strength, not weakness,
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  because of this supportive policy backdrop.
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  Philip, thank you very much for your time.
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  Philip Saunders is director of Investment Institute at 91 in London.
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  The views and opinions expressed in these podcasts are those of Lindsay Williams and
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  various contributors and do not reflect the policy,
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  position or opinion of any other agency, organisation,
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  employer or company associated with StrictlyBusinessPodcast.com.
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  entity other than the speaker or the author.
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  And since we are critically thinking human beings, these views are always subject to
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  change, revision, and revision.
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  and rethinking at any time.
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  Please do not hold us to them in perpetuity.