by Jim Rickards, Daily Reckoning:
Last Friday’s GDP number came in weaker-than-expected at 1.6% annualized, the weakest quarterly gain in almost two years.
I’ve written for months that there would be no interest rate cut by the Fed at their June meeting. Wall Street was putting the odds of a rate cut at around 70% and the stock market was rallying in anticipating the cut.
They were wrong, I was right. That’s not to brag, it’s just that I use a better set of analytic tools than they do.
TRUTH LIVES on at https://sgtreport.tv/
Today, every top Wall Street analyst is proclaiming there will be no rate cut in June, and maybe not in July either. Thanks, guys and gals. You’re only about three months behind the curve.
That’s worthless forecasting, but it’s what Wall Street does best.
Now there’s a chance that we won’t get any rate cuts this year. So Wall Street has been wrong about rate cuts for almost two years, and they’re wrong now.
Recall, by the late summer of 2022, Wall Street was already talking about the “pivot.”
This was jargon for a rate cut. No one expected it that soon, but early 2023 was Wall Street’s target date for the pivot. That never happened. Wall Street extended the pivot date of mid-2023. Then late 2023. Then early 2024. Wrong, wrong and wrong.
Moving the pivot date from June 2024 to later this year is just the latest blunder.
Pivot Mania
This pivot mania has gone by several other names. One was the “soft landing”: the idea that the Fed had beaten inflation without causing a recession and could put the economy on a sustainable growth path.
In effect, a masterpiece of Fed finesse. Another name was “Goldilocks” on the view that Fed policy was “not too hot, not too cold, just right!” another tribute to Fed finesse.
It’s all nonsense: a narrative designed to lull investors into complacency and to buy more stocks. The truth is the Fed has no idea what it’s doing, the Fed doesn’t matter that much anyway and Wall Street is in the tagalong business, not real forecasting.
One reason Wall Street has been so wrong about forecasting the Fed is that the Fed is wrong itself. With armies of researchers, practically unlimited computing power and supposedly top-flight governors, how can the Fed be so wrong?
The answer is that the Fed models are junk science. Those models will always get the wrong result. If that’s true (it is), and if Wall Street is following the Fed (they are), then Wall Street will get the forecast wrong also. It’s the blind leading the blind.
Explain This, Fed
We can start with the Phillips curve. This model says that there is an inverse correlation between unemployment and inflation. If unemployment is low, one should expect inflation to be high, and vice versa. The rationale is that tight labor markets lead to wage demands that increase spending and feed inflation.
The problem is there is no empirical data to support the model.
In the early 1960s, the U.S. had low unemployment and low inflation. In the late 1970s, the U.S. had high unemployment and high inflation. In the 1930s, the U.S. had high unemployment and low inflation (actually deflation). From 1974-1975, the U.S. had low unemployment and high inflation.
Do you see a correlation there? Stop looking, there isn’t one. The Phillips curve is garbage. There are many causes of both unemployment and inflation, but a strict inverse relationship is not one of them.
The Fed also takes the view that interest rate cuts offer “stimulus” and interest rate hikes offer “monetary tightening.” That’s also garbage.
The Fed Doesn’t Get Interest Rates
During times of severe economic distress (the Great Depression is a good example), interest rates drop to near zero. When economies are booming, interest rates rise because more companies are competing for more funds to expand capacity and to make investments.
Things can go too far. High rates will eventually lead to overcapacity and a recession. Low rates will eventually lead to investment opportunities and a new expansion.
But those turning points happen at the extremes as part of a normal business cycle. In the normal state of affairs, higher rates are associated with good times and low rates are associated with recessions or worse.
The Fed has this exactly backward. The Fed does not lead the business cycle, they chase it.
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