Trust the Rothschilds
Trades in Soda;
It’s interest rate week, with the US Federal Reserve showing their hand tomorrow. The Bank of England then moves on Thursday, and the Bank of Japan on Friday. The European Central Bank held firm last week. The market is looking for a 0.25% cut in the US and holds elsewhere. Investors are getting excited.
I would remind them that rate cuts aren’t always a good thing. They were positive in the late 1990s, but in 2001/2 and 2007/8 they oversaw the stockmarket collapse. We should question why interest rates are being cut. In 2001/2 and 2007/8 it was to offset recessions. In 2020, it was to offset lockdowns, which turned into a boom when the world reopened.
S&P 500 and Interest Rates
Despite signs of a weakening consumer and jobs market, this time will stand out as rates will be cut for political rather than economic reasons. US CPI is 2.9%, with a 2% target, yet rates will be cut regardless. As I said, rates were cut in the late 1990s after the Asia crisis, which led to a boom in tech. While tech boomed, the defensive stocks spluttered but then provided sanctuary in the 2000 to 2002 bear market.
Defensive versus Risky 1997 to 2004
This is a follow-on point from yesterday’s Global Trend piece, which I hope you enjoyed. I see the rotation back into defensive stocks (quality) as a likely outcome when the risky market leaders finally throw in the towel. The launch of ByteTree Quality might be a little early, but strategically, the timing feels right.
One problem that has been overlooked is that by cutting rates now and anchoring the long bond yield rather than letting it spike, the risk is inflation next year. Still, there are no signs of that happening, except (of course) for a roaring gold price. Copper is not looking too shabby weather, which is driving Glencore (GLEN).
London Metals Exchange - Copper
We shall return to this subject when the evidence starts to come through. In the meantime, I wanted to update clients on Man Group (EMG), which has lagged the Whisky Portfolio since purchase.
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