In my speech (video above), I made three points
Trump will secure victory on November 5th and what that means.
The Fed will cut 25bps in November and December and then pause.
Current Fed policy isn't truly restrictive, as evidenced by robust economic indicators and financial market strength.
Point I: Trump will secure victory on November 5th.
I’m not going to hedge or equivocate: Donald Trump will be elected the 47th President of the United States. National polling (which already understates Trump’s strength) shows Harris up by just one point, compared to the 6-10 point leads Clinton and Biden held just before their respective elections.
Trump will ultimately win because of widespread discontent about the economy and the border, neither of which Kamala Harris has substantively addressed with coherent policy. Instead, she has spent her time suggesting that Trump is Hitler.
With a Trump victory inevitable, let’s talk about Trump and tariffs, the source of much investor angst these days. One big misconception I clarified in my speech above is the endless noise about Trump’s tariffs. Here’s the truth: the headlines you see about 200% tariffs on certain companies or countries are a negotiating tactic that Trump has successfully used in the past. His tariff talk should be taken seriously, not literally.
Point II: The Fed will cut 25bps in November and December and then pause.
Think of Fed easing cycles in terms of haircuts. A "buzz cut" is what we saw in 2008 or spring 2020 – dramatic, emergency cuts to zero when facing crises like the housing collapse or COVID. But what we're seeing now is more like a "trim" – similar to the 1995, 1998, and 2019 “mid-cycle adjustments,” each of which resulted in 75bps of total Fed rate cuts. The Fed isn't responding to an imminent economic threat today; they're recalibrating as inflation has dropped from 8% to the low threes and the labor market has softened on the margins (largely because of an increase supply of workers).
Fed will cut by 25 basis points both in November and December, then pause as the economy and markets continue to surprise positively, making the remaining 80bps of rate cuts priced in 2025 look excessive and attractive for those who trade SOFR interest rate futures.
Point III: Current Fed policy isn't “overly restrictive.”
“R-star” is Fed jargon for the neutral interest rate that neither stimulates nor restricts economic growth.
At the September meeting, Chair Powell said you "judge r-star by its works" – meaning you look at how the economy actually responds to rates to gauge whether or not policy is restrictive instead of putting your faith in an economic model.
While the median Fed member believes interest rates are restrictive because their estimate of r-star is 2.9% vs. today’s fed funds rate of 5%, real-world indicators tell a very different story:
S&P 500 making new all time highs
Q2 GDP revised up to 3%
Bitcoin making new highs ($73,000 as I write)
Credit markets remain robust
Only 4 percent of small business say that financing is their top business problem
When you judge “r-star” by its works (how the economy/markets are responding), you’re left with one conclusion: Fed policy is not overly restrictive.
As I outlined in my last note, high interest rates (only relative to recent history) aren’t really slowing down the economy given the unique interest rate sensitivities in the United States. In 2020-21, businesses locked in low financing rates and consumers locked in record-low mortgage rates, insulating them from Fed rate hikes. At the same time, both businesses and consumers began earning 4% on excess cash. Counterintuitive indeed.
I hope you’ll give the speech a listen. I get into a lot of detail about each of these points. Always eager to hear feedback and counterpoints: james@azoriapartners.com or simply reply to this email.
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