This country is so consumed in “Woke-ism”, “Climate Change” mantras and “Diversity, Equity, and Inclusion”, [DEI], along with other wars on the establishment that now even the highest government agencies are expected to follow suit. Note that our U.S. Treasury has already gone to the quacks, owned outright by the left and its liberal woke-ism. What I want to unwrap here is this [recent] spiel coming from fake news outlets and some financial market pundits, that we can expect between three and six rate cuts in the new year. Wow! Now I’m trying to imagine the backdrop necessary for our Federal Reserve to cut interest rates six times, and I still can’t [imagine it] as that would be an extraordinary move. What would the backdrop look like to have this occur?

Let’s discuss the why’s and where-fors of rate cuts, shall we? Back in the day when the Federal Reserve Board had integrity, before the “climate change” radicals with their woke-ism and make-believe Socialist Utopias gained any popularity the Federal Reserve Board operated strictly by mandate which was to maintain “price stability” across the country. They weren’t messing with employment directly or the climate or liberal utopian values like DEI, no, they stayed true to purpose which led them [on every occasion] to consider only the underperformance or outperformance of the U.S. economy, that’s it. Back then the only time they would cut interest rates was to stimulate an under-performing U.S. economy, one either on the brink of recession or one already mired in a recession. Under no other circumstances was the Federal Reserve [of old] out to tweak stock and bond markets by miscellaneous rate cuts to satisfy some political camp.

Friends it appears that those days are long gone – the latest word on the street [and the stock tape reflects it too] is to look for numerous rate cuts coming in 2024. If this Fed operates the way they are supposed to operate – the way they used to operate, staying true to their mandate, economic activity would have to fall substantially to see the predicted “multiple” rate cuts. A host of rather ugly things like massive layoffs would have to accompany such a contraction scenario. However, the last two reads of Gross Domestic Product [GDP], [which measures the value of all U.S. goods and services over time], claims that the U.S. economy grew at around 2.6% in Q2 and a whopping 3.9% in Q3 of 2023. I’m sorry but posting those kind of numbers does not a rate cut scenario make. Unless the numbers are fake, rigged, like most news coming from media outlets in the country today. I’m not necessarily claiming these recent GDP reads are fake although I know government spending has accounted for a ton of the last few GDP prints, which is an alarming statistic in itself [but that’s a topic for another day].

Back to the question at hand. The only way a scenario of several rate cuts plays out in 2024 is if this economy falters, and not just a hiccup but a substantial decline. Given that, one would expect a large drop in corporate earnings across the board, no sector would be safe although some sectors will always fair better than others in a decline of this magnitude. What will work? Well, where I’ve been [for most of] the past two years has been in short-term [high quality] bonds, that’s right, paper. It’s been a steady ride, most of these positions have been in the money all the way to maturity. In addition, when you add a Federal Reserve having to cut rates as many times as these woke pundits claim they will, guess what? One can venture further out in the bond space seeking returns on intermediate and even longer term issues. A lot of people are unaware of this but the bond market actually outperformed the stock market on average and for multiple years in the past. The reason is because when the economy underperforms over long spans of time, lowering rates is one of the main tools the Fed has to try and re-start, or stimulate the patient into action. If these silly Wall Streeter pundits prove correct and the Fed gets that involved in lowering rates in the new year, holding some high quality paper is a one way to ride out a decline in corporate profits.

We shall see how all this plays out in the new year but one thing is for certain – we won’t see corporate earnings hold up in mass while the Fed is having to aggressively lower interest rates [the 3 to 6 rate cuts predicted] in order to revive the patient during a downturn in the economy. So these trigger happy stock market gurus, all giddy about a series of Fed rate cuts in 2024 in order to lift stock returns need to “watch what they wish for” as they can’t have both.

Wishing All a Happy New Year! 🙂