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The Great Financial Puppet Master

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The Great Financial Puppet Master

Recently, the Federal Reserve did as everyone was expecting – they cut rates 25bps. Shortly after the rate cut, President Trump announced greater tariffs on imports from China and that the Chinese government was a currency manipulator. Was the timing a coincidence or were these announcements strategically timed? I guess it doesn’t really matter. The markets (I mean speculators and algorithmic trading programs) have been selling off since the announcements.

Differing Views

Going into the rate cut, there were two very different viewpoints. One was that growth is slowing, we are not near the 2% inflation target and the rest of the world has much lower rates. That means the Fed is behind the ball in cutting rates. A quarter point was chump change, we needed something bigger.

The other side was stating how we don’t need a rate cut because the economy is still strong. Unemployment is low, wages are rising and if we were to have a real slow down (recession), best to have some powder left in the keg.

According to Ben Carlson, the Fed has cut rates 160 times since 1960. 98% of the time unemployment was higher than it is today, 92% of the time the rate cut was made from a higher Fed Funds rate and only one time since 1960 has the Fed cut rates with both unemployment and Fed Funds rate this low. But that didn’t last long as the Fed turned course and raised rates twice shortly thereafter. It doesn’t look like that will happen this time around.

After this last rate cut, the odds of another rate cut in September soared to 75%. A few days later the futures market priced in a 100% chance of a Fed cut in September. In fact, as of the time of this posting, a 50bps rate cut in September is becoming the base case (highest probability).

The Great Market Reaction

There has been a lot of market movement in the past week. But what has really changed? We knew the rate cut was coming. We knew Trump was going to be tough on China. We probably had an idea that China wasn’t going to rollover. We know the economy is pretty strong. So what really changed? Did companies suddenly stop selling goods and making money? Are we investing in companies or are we speculating on stock prices of companies?

What changed was our expectations and perception of risk. And how we feelnow that the stock market is giving up some gains. Expectations, perceptions and feelings are all subject to new information – meaning they are not enduring. When things are going well, and we are making money, we tend to have very optimistic expectations and positive feelings. When things are all the sudden not so well…well, the pendulum swings both ways.

The Great Investing Challenge

The greatest challenge with investing, indeed with just about aspect of human life, is that we want all the good things, and none of the bad. In early July, advisors were likely on defense with clients as they reviewed their diversified portfolios and the relative underperformance to the S&P 500. One month later and now they take calls from clients wondering how much to put in cash/gold.

It is amazing how quickly things change on a dime. One day we exhibit FOMO and the next day our very financial survival is at risk. It doesn’t have to be this way. But that would require some change in our attention and actions.

The Great Puppet Master

The financial media is the great puppet master. And we investors grant them that power. The media has a good deal of influence over our moods. Both good and bad. And that can affect our investment decisions, our personal relationships and the quality of our lives. Why do we give the media and investment markets so much power? How do we stop?

If there were an easy answer, we would all do it. The answer is simple, but that doesn’t mean it is easy. We know to lose weight we need to eat less calories than we burn. Simple, but incredibly difficult. You can cut the puppet strings today if you want. All you need to do is stop looking. Turn it off. Go and do something productive that will bring you joy. Feeling bad because the markets are selling off? Turn it off and go serve at a homeless shelter. Bake a cake and bring to your neighbor. Serve someone else! Positive distraction is one of the best antidotes to feeling bad about your situation.

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