Mike’s Morning Brief – October 30, 2019

What’s going on in the world…

Market opens flattish again as the investment world is braced for the Fed meeting. A cut is expected. What happens next matters most. Will they pause, as is clear what Fed Chair Jay Powell wants to do. There are some on the Fed that believe a cut is unnecessary as the US Economy is still chugging along just fine and dry powder should be maintained for when it’s really needed. I concur. It is highly questionable to keep cutting interest rates with the unemployment rate already at 5-decade lows and the Stock Market at all-time highs. Asset prices have risen significantly and demand for US assets remains strong. We see it in stocks, in bonds, and in real estate. The Dollar has been strong. They all seem overpriced by most measures. The average American has been priced out of housing in many regions. The cost of ownership is very high. Interest rates have been historically low overseas, and in many cases negative. They have not worked. And there are unintended consequences of negative rates. Low rates mean cheap money. Cheap money tends to encourage reckless behavior. There are already signs of excesses in venture capital and private equity. They’ve tried to tap the public market with very mixed success. There have been some winning IPO’s. But the high profiled unicorns have been a disaster. That’s UBER, that’s LYFT. WeWork couldn’t even go public. The company was valued at $40 Billion privately. The company couldn’t even get a deal done at $10 Billion and is now running out of money. Excess liquidity created WeWork. The risk is, it spills further into the greater market place. The Stock Market wants cheap money. It’s addicted to it. We saw firsthand what happened when it didn’t get what it wanted last December. A 20% crash ensued. There is another setup for potential disappointment today. We don’t think it will be anything like last year. But the risks are there. This does not feel like a healthy Market. A healthy Market shouldn’t depend on medicine at this mature stage. That’s all it knows. It’s been the case for 11 years, since the Financial Crisis. The Fed has been held hostage by the Market. There’s also someone in the White House who thinks rates should go to zero if not negative. I suppose anything is possible. We shall see what today brings. We are bracing for anything.

Have a great morning,

Mike Frazier

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