0:05

Beautiful God.

0:12

Over the past few years, it seems as

0:14

if markets have been obsessed with

0:17

Federal Reserve action, first

0:19

the rate hiking cycle and now quote

0:22

unquote the inevitable rate cuts.

0:25

Investors might find it useful

0:27

to know when is the FED going to start

0:30

a new cycle of cutting

0:32

rates. As it turns out, there's

0:34

specific data you should be looking at

0:36

to know when that cycle might begin. I'm

0:39

Barry Ridhelts, and on today's edition

0:41

of At the Money, we're going to discuss

0:44

how you can tell when the Fed is

0:47

going to start cutting rates. To

0:49

help us unpack all of this and what it means for

0:51

your portfolio, let's bring

0:53

in Jim Bianco, chief strategist

0:55

at Bianco Research. His firm

0:58

has been providing objective, an

1:00

unconventional research and

1:02

commentary to portfolio managers

1:05

since nineteen ninety and it's top

1:07

rated amongst institutional traders.

1:10

So Jim, let's just start with the

1:12

basics. How significant

1:14

are rate cuts or hikes

1:17

to the typical market cycle?

1:18

How much do they really matter?

1:20

Thanks for having me, Berry, and the answer is they

1:22

matter more now than they have, say, over

1:24

the last fifteen years, for a very simple

1:26

reason. There is a yield again in

1:29

the bond market. And as my friend

1:31

Jim Grant likes to say, who writes the

1:33

newsletter, Grant's Interest Rate Observer, it's

1:36

nice to have an interest rate to observe again,

1:38

And because of that, we've

1:41

got a whole different dynamic. Well,

1:43

in twenty nineteen, when

1:46

your average money market fund was yielding zero and your

1:48

average bond fund was yielding two percent, we

1:51

used to scream, Tina, there is no alternative.

1:53

You can't sit there in a zero money market fund.

1:55

You got to move up the risk curve to stocks,

1:58

and you've got to, you know, try and get some kind of reward

2:00

from it. Well, in twenty twenty

2:02

four, now a money market fund

2:04

is yielding five point three percent and a bond

2:07

fund is yielding around four point

2:09

eight to five percent. Well,

2:11

that's two thirds of

2:13

what you can expect out of the stock market.

2:16

And especially if we wanted to stick with a money market

2:18

fund and virtually no market risk,

2:20

because it has an neev of one dollar every

2:22

day, and there's a fair number of people

2:24

will say seventy percent, two thirds

2:27

of the stock market without any risk

2:29

at all market risk, that is sign me up

2:31

for that.

2:32

So let's talk about raising and

2:34

lowering rates. I have

2:36

to go back to twenty twenty

2:39

two when the Fed began

2:41

their rate hiking cycle. It

2:43

seems like a lot of investors were blindsided

2:46

by what was arguably

2:49

the most aggressive tightening cycle since

2:52

since Paul Volker five hundred and

2:54

twenty five basis points in about eighteen

2:56

months. Why, given what

2:59

had happened with CPI inflation spiking,

3:02

why were investors so blindsided

3:04

by that.

3:05

They had gone forty years without seeing inflation

3:08

and they couldn't believe that inflation

3:11

was going to return. And the typical economist

3:14

actually was arguing that there

3:16

is no more inflation again. And

3:18

I might add to this day, the typical

3:20

economist still argues that

3:23

we don't have inflation.

3:25

Now.

3:25

I'm fond of saying that the term two

3:27

things could be true at once. And

3:29

what you saw in twenty twenty two, twenty twenty

3:31

one, and twenty two two is

3:34

transitory inflation that

3:36

got us to nine percent on CPI.

3:39

But once that transitory

3:41

element of nine percent is settled

3:44

out, what I believe we're

3:46

starting to see more and more of is there

3:48

is a new underlying higher inflation

3:51

level. It is not two percent, It

3:53

is more like three to four percent inflation,

3:56

not as I like to say, it's not eight ten or Zimbabwe.

3:58

It's three to four percent. And that

4:00

three to four percent is

4:02

what's got the Fed slow

4:05

in cutting rates. It's got people debating

4:08

whether or not interest rates should come down more

4:10

or go up more. So, yes,

4:13

we had transitory inflation because of the lockdowns

4:16

and the supply train constraints, and

4:18

that has gone away, but left

4:21

in its wake is a higher level

4:23

of inflation, and that is the debate

4:25

that we're having right now. And if we have

4:27

a higher level of inflation, that

4:30

is going to weigh heavily on monetary

4:32

policy.

4:33

He hadn't done them any good.

4:35

So in the mid nineties, where were

4:37

rates? How high had they gone up?

4:39

And then how much lower had the

4:41

Fed taken them?

4:43

So they were at six percent at their

4:45

peak in late nineteen ninety four,

4:47

and the Fed started to cut rates

4:51

and then they eventually wound up a cutting them all

4:53

the way down to three percent. At that point,

4:55

we thought that three percent was a microscopically

4:58

low interest rate. We know what

5:00

we were in star Forth over the next twenty years,

5:03

So those rates were not very

5:05

different than the rates that we're seeing today

5:07

with the FED being a five to five and a quarter and

5:09

with the bond with the yield and the ten year

5:12

Treasury at around four fifteen to four twenty,

5:14

so we're kind of in the same range that

5:17

we've seen that.

5:18

So if I'm an investor

5:20

and I want to know the

5:23

best data series to track

5:25

and the levels to pay attention to,

5:28

that are going to give me a heads up that, hey,

5:30

the FED is really going to start cutting rates.

5:33

Now what should I be looking at

5:35

and what are the levels that suggest?

5:38

Okay, now the FED is going to be comfortable,

5:41

maybe not cutting them in half the way they

5:43

did in the mid nineties, but certainly

5:45

taking rates from five to five

5:47

and a quarter down to four

5:49

to four and a quarter four and a half something like

5:51

that.

5:52

So one forward looking measure and one

5:54

kind of backward looking measure that matters for the FED.

5:56

The forward looking measure is going to be probably the labor

5:59

market. What the FED is most concerned

6:01

about is higher interest rates. Are they

6:03

going to weigh on business

6:05

borrowing costs and reduce

6:07

their propensity or willingness to continue

6:09

to hire workers. So let's

6:12

look at the initial claims for unemployment

6:14

insurance. It's a number that's put out every Thursday

6:17

for the previous week initial

6:19

claims. Everybody has unemployment

6:21

insurance. It's a state program BUERAFU

6:23

label. Statistic just aggregates to fifty states

6:26

and puts out that number on a seasonally

6:28

adjusted basis. It's in the low two hundred

6:30

thousands right now. That is over the last

6:32

fifty years, an extraordinarily low number,

6:35

you start to and so if it goes

6:37

up to two twenty five or two forty, it's still

6:39

a low number. I think if you start seeing

6:42

it, you know, start pushing two

6:44

seventy five or above three hundred thousand,

6:47

are that means new recipients

6:49

for unemployment insurance that week?

6:52

Then I start thinking that, you

6:54

know, there is a real problem starting

6:56

to brew in the labor market. The Fed will see that too,

6:59

and the propensity for them to cut will

7:01

grow. And I want to emphasize here two

7:03

hundred thousand on Wall Street

7:05

tends to kind of get themselves myopic.

7:07

Here, Oh, it went from two hundred thousand

7:09

to two hundred and twenty five, two hundred and thirty

7:11

thousand.

7:12

The labor market is weakening.

7:14

No, that's all noise down near the lowest numbers

7:16

that we've ever seen in fifty years. It's got

7:18

to do something more significant than that.

7:20

What's the best inflation data to

7:22

track that? You know, Jerome Powell is paying

7:25

attention to.

7:26

So Pow likes this obtuse

7:28

number. He likes it because he made it

7:30

up called cores

7:33

supercore. So it's it's

7:35

it's inflation less house excuse

7:38

me, less food, less energy, and

7:40

less housing services. Now before

7:42

you roll your eyes and go, so you're talking about

7:45

inflation provided I don't eat, I

7:47

don't drive, and I don't live anywhere.

7:49

Inflation ex inflation right

7:52

right, what's left over is driven

7:54

by wages. And why he looks at

7:56

that is he's trying to say, are

7:58

we seeing a wage spiral?

8:00

Now? Why is a wage spiral important?

8:03

No one is against anybody getting a raise,

8:05

But the fact is, if everybody is

8:07

getting a four percent raise,

8:10

you can afford three to four percent

8:12

inflation. If everybody's getting a five

8:15

percent raise, you can afford four percent

8:17

inflation. And that's what they're most

8:19

concerned about, is getting that inflation spiral

8:22

going with a wage spiral. So they look

8:24

at the super core number as a way

8:26

to say, yes, we understand that there's housing.

8:29

We understand that there's driving, we understand

8:31

that there's eating, and there's inflation in those three.

8:33

But we also understand that there's way inflation

8:36

in wages. And that's what they're trying to do

8:38

is look at wages, and so that's probably

8:41

the best measure to look at.

8:42

So I know what a data wonk and

8:44

a market historian you are, but

8:47

I suspect a lot of investors,

8:50

a lot of listeners, may not know what

8:53

happens to the bond market

8:56

and the equity market once

8:58

the Fed finally begins cutting

9:00

rates.

9:02

It depends on why, because there's

9:04

two scenarios in there. If

9:07

the Fed starts cutting rates like

9:10

it did in twenty twenty, or like it did

9:12

in two thousand and eight, or

9:14

like it did even in two thousand and one, and

9:17

it's a panic, Oh my god,

9:19

the economy is falling apart. People

9:22

are losing their jobs. We've got to start to

9:24

stimulate the economy. We have

9:26

to stop a recession. If

9:28

they're cutting rates because of a panic,

9:31

it doesn't work. We had recessions

9:34

every time they started doing that, last one being twenty

9:36

twenty when they saw what was happening with COVID,

9:39

and because it is projecting

9:42

a recession, which means less economic activity,

9:45

lower earnings. It's

9:47

usually a difficult period for

9:49

risk markets like the stock market or real estate

9:51

prices and the like. If the

9:54

Fed is cutting rates like

9:56

they did in nineteen ninety five or like

9:58

they did in twenty nineteen, it's

10:00

kind of a victory lap.

10:01

We did it.

10:02

We stopped the bad stuff from happening,

10:04

our magic tool of interest rates, accomplished

10:07

everything that we need. Now we don't need

10:09

a restrictive rate anymore, and

10:12

they back off of that restrictive rate.

10:14

Well ninety five and twenty nineteen, risk

10:17

markets took off. Now twenty nineteen

10:19

was short lived because then COVID gotten away,

10:22

and that was an exogenous event that was not financially

10:25

related. But they were going right

10:27

up until the moment that COVID

10:29

hit. So why is the Fed

10:32

cutting rates? It really matters

10:34

more than when will they cut rates?

10:37

And right now what everybody's

10:39

hoping for is the why will

10:41

be a victory lap. We did

10:43

it, We stopped that bad old inflation. It's

10:46

gotten back to our two percent target. We

10:48

could go back to the way we were pre pandemic.

10:51

And then once we're there. We

10:53

could now start to back off of this restrictive

10:56

rate and everybody will

10:58

celebrate that. Yay, we're getting into straight

11:00

relief without it being a signal

11:02

that the economy is falling.

11:04

So to wrap up, investors

11:07

hoping for rate cuts should be aware that

11:10

sometimes there's a positive response

11:12

when it's a victory lap. Sometimes

11:15

when it's revealing the

11:17

economy is softening or a recession is

11:20

coming, tends not to be good

11:22

for stocks. Volatility tends to increase.

11:25

It's a classic case of be careful

11:27

what you wish for. But if you want

11:29

to know what the Fed is going to do, you

11:31

should keep track of initial unemployment

11:34

claims. When they get up towards three hundred

11:36

thousand per week, that's a warning

11:39

sign. And follow Chairman

11:41

Pal's super core Inflation, where

11:44

he's looking at the rate of wage

11:46

increases to determine when the Fed

11:48

begins its newest rate

11:51

cutting cycle. I'm Barry

11:53

Retults and you've been listening to Bloomberg's

11:56

at the Money, got.

12:01

Head. I know the

12:03

first kind is the gems.

12:08

And it counts up bigger lucky,

12:10

She's goose.

12:13

Then it comes laughing, she's

12:17

worse.