The first snowfall of the season came last night.
Just a dusting… but the mountains of Virginia sure look magical when they are covered in snow. I snapped a few photos down by the river this morning:
This is the small walking path that winds its way next to the Jackson river.
In the background you can see old Smith’s bridge. It’s a steel bridge that’s just wide enough for a truck to cross the river. It connects what was once Smith’s farm with the Cliffview Inn.
Getting back to finance…
Yesterday we talked about the market’s reaction to the alleged “Fed pivot” last week. The S&P 500 is now up nearly 6% in just the last week and a half on expectations that the Fed is about to cut interest rates.
But we noted that the market is ignoring something very important. The “dot plot” that signals seven rate cuts over the next 24 months doesn’t come from the Chairman nor does it influence monetary policy.
Instead, the dot plot is simply projections from each of the 12 members of the Federal Open Market Committee (FOMC). And if we look at who those members are, four of them are new to the FOMC this year.
Coincidently, the four new members each favor aggressive rate cuts. Meanwhile, the four members they replaced supported Fed Chair Jerome Powell’s aggressive rate-hiking campaign last year.
So this looks to me like the four new members are projecting their desires onto the dot plot… and institutional investors are taking that at face value because they want to get back to the “number go up” days in the stock market.
I think they are in for a rude awakening.
Powell probably will sign off on a small rate cut or two next year. There’s going to be a ton of pressure on him to do so ahead of the 2024 presidential election.
But those rate cuts will likely be 25 basis points (0.25%) each. Given that Powell jacked up the Fed’s benchmark lending rate by over 500 basis points (5%) – do we really expect a few piddly rate cuts to stimulate the financial markets?
I certainly don’t. In fact, the market is more likely to fall on the news because it has already priced in a more aggressive “pivot”.
The thesis that I’ve presented in these pages and in my book Beyond the Nest Egg is that the Age of Paper Wealth is over.
The Fed did not aggressively hike rates last year just to turn around and beat them back down to where they were. Those who are peddling that narrative don’t understand what the Fed is really doing.
The Fed isn’t simply trying to fight inflation. The battle they are fighting is much bigger than that… and the Fed needs to normalize interest rates if it wants to win.
So we’re in a new paradigm now.
And that means we need a new approach to money and finance. More on that tomorrow.
-Joe Withrow