Rate Cuts? At All-Time Highs?
For the last six weeks or so, the "Cut Rates Now" Choir has been building toward some kind of roof-shaking crescendo.
I'm talking a real March 2000 blow-off top kind of crescendo. The kind where, years later, you're still staring up at those bygone highs and wondering if you'll ever see them again...
Like Nasdaq 5,000. That only took 14 years to reclaim (and then it ran another 50% in two years). Or like Cisco (NASDAQ: CSCO) at $80. Though, really, it's kind of the same thing, considering what a key player Cisco was for the Nasdaq to be at all-time highs 29 years ago...
Cisco is not so important these days. So maybe not that many people are aware it's still $23 away from those highs, about 45%. (Wealth Advisory subscribers are sitting on a sweet 95% gain with Cisco.)
It's a bit ironic that it was Alan Greenspan's 50 basis-point rate hike on March 21, 2000, that effectively popped the internet bubble and sent Cisco and all the other tech stocks plunging.
That 50-point hike choked off an amazing run for stocks — the Dow Industrials really started cooking in 1994, from around 3,700. It was 8,000 points higher when Greenspan dropped the hammer.
But that was nothing compared to the economic changes the internet was bringing. It still boggles my mind that this was just 20 years ago. All the internet needed to connect the world was for the biggest physical barrier to be removed. And when the Berlin Wall fell, the floodgates were open.
Now we're looking at another interest rate move that might forever be associated with a stock market bubble...
Earth to Jerome Powell, Come in Powell
The hike that killed the tech bubble took rates to 6.5%. I may be wrong about this, but I don't think history has been unkind to Greenspan. Well, not for this move, anyway. He was right: Tech stocks were in a bubble. That he would go on to blow the most damaging asset bubble the world has ever known has surprisingly not been the black mark you'd think it would be...
It will be interesting to see how history views Jerome Powell if he cuts interest rates as he is widely expected to do.
The Fed funds rate sits at 2.5%. President Trump tells us that this is "way too high."
The unemployment rate currently sits at 3.6%. That is a 60-year low.
We have the longest streak of monthly employment gains in U.S. history — 104 months.
Relative to unemployment, we have a record number of job openings.
The S&P 500 is having its best year since the Asian currency crisis — up 18%.
And yet, somehow, interest rates are too high; they are choking off growth.
It's tough see where the U.S. is disadvantaged compared to the rest of the world. We continue to have the strongest and most stable economy in the world. But I guess that doesn't jibe with the whole victim culture that voters are responding to these days.
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So the market now says there is an 80% chance that Powell will cut rates within two months. We have officially entered Bizarro World.
I say that, but then I think about it, and the truth is we've been in Fed Bizarro World ever since the financial crisis. I like to picture Ben Bernanke dressed up as Willy Wonka in that crazy purple suit, standing at the front of his wacky boat singing, “There's no knowing where we're rowing, Or which way the river's flowing...”
Have Some More Debt
The whole point of low interest rates is to encourage everyone to take on debt. Yay, debt! And Fed policy has been unbelievably effective over the last decade.
U.S. corporations have more debt than they ever have. And they've used the money to buy back their own stock. Which has the net effect of making them look like more attractive investments.
Corporate stock repurchases account for something like 20% of trading volume these days. The Fed is going to ensure that these buybacks continue. Because what if you lose 20% of market volume? Stocks will tank. Liquidity will dry up. Cats and dogs living together...
Think of the stimulus the U.S. economy has already gotten in the last couple years. Like that big tax cut. It's time to stand down and let this economy work its way through something. It's probably too late for that...
The stock market has priced in an interest rate cut. Maybe two. If Powell doesn't deliver, the market will get nailed. So when he cuts, get ready. Stocks will likely take off on an adrenaline-fueled Hunter S. Thompson-like rampage. We will party like it's 1999 and blow the roof off the sucka.
And then? Those bills come due.
It's going to be very important that you make as much money as you can in the stock market and get your financial house in order before that happens.
Until next time,
A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.
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