Dating and Interest Rates 

There’s a bloke I know who’s like a walking dating app.

In the twenty plus years I’ve known him, I reckon the longest I’ve seen him not in a relationship is about two months.

And even though he’s dated some really nice girls, his longest relationship hasn’t lasted any longer than about three years.

Not surprisingly, when he told me recently he’d like to get married. I laughed!

The problem is, even though he’s a nice enough guy, he enjoys the chase more than the catch.

As soon as the fun wears off, he craves a new dopamine hit.

Money can have the same effect.

Last October, Jerome Powell, head of the Federal Reserve Bank, first hinted a rate cut was not too far away.

Consequently, investors got all hot and excited and chased the market hard for the next eleven months, pushing it higher every time he flirted with a rate cut.

And then on Wednesday night, J. Powell stopped his teasing and cut rates by 50 basis points.

The market finally got it’s catch.

But how long will the lusting last?

On Wednesday, Mr. Powell also said, “…the US economy is in good shape and to expect a soft landing”.

If that’s the case, why cut rates if it’s not in trouble, unless of course, it is.

Remember, this is the same bloke who in 2020 lead borrowers up the bankers path when he said “…there wouldn’t be a rate hike until 2024”. 

And then in 2021, he said “…inflation was ‘transitory’ (temporary)”

So perhaps we should assume the opposite…the economy is not in good shape and to expect a hard landing.

The risk to this market is this week’s rate cut (plus future cuts) have already been baked in to the market.

Meaning, in the past eleven months, investors have pushed the market up 35% on the expectation we’ll get a rate cut of 1-2%.

Consequently, it’s now the second most expensive market in history.

So, will the markets remain at these levels or will investors start unloading when they realise chasing the market up 35% was better than catching a rate cut of 1-2%.

I reckon they’ll follow my friend.

Have a great weekend!

Adam

Back paddock – the quickest fix is accepting the longest path.