The Fed and a rate pivot; U.S. Retail Sales Show Holiday Season Off to Strong Start; Sources of America's deficit; Billionaire Leon Cooperman on Trump, Bezos Plot, Taxes, and Israel; Off to Kenya; This Kenyan Slum Has Something to Teach the World
1) The U.S. Federal Reserve, as expected, kept interest rates steady yesterday and indicated that it was thinking about cuts next year (investors are now expecting three). Here's the Wall Street Journal with more on this: Fed Begins Pivot Toward Lowering Rates as Inflation Declines. Excerpt:
Slowing inflation prompted Federal Reserve Chair Jerome Powell to pivot away from raising interest rates and toward considering when to cut them, igniting a rally on Wall Street.
The Fed held its benchmark federal-funds rate steady at a 22-year high on Wednesday and offered every reason to think that its most recent increase this past July probably marked the end of the most aggressive cycle of hikes in four decades.
At a press conference, Powell focused instead on the risk of causing unnecessary harm to the economy by leaving rates too high as inflation falls. "We're aware of the risk that we would hang on too long," he said. "We're very focused on not making that mistake."
The news sent stocks soaring, with the Dow Jones Industrial Average hitting an all-time high and the other major indexes moving near that level.
Here's a "Heard on the Street" column in the WSJ about why the Fed might cut rates sooner than expected: The Fed's Yield-Curve Problem. Excerpt:
The problem is that, after falling so much, long-term rates might already be as low as policy makers would like them to be. The drop in Treasury yields since October has ignited something of an everything rally that has pushed stocks and an array of other investments sharply higher. Companies can now tap the bond market at lower rates, while the housing market seems poised to bounce back.
But short-term rates matter, too. Credit card rates, which are based off of the prime rate, are high. That not only affects consumers' borrowing power but also risks pushing some people into worse financial straits. High short-term borrowing costs can weigh on businesses, too, by making it more costly to finance inventories, for instance.
Ideally, what the Fed might like is to be able to lower short-term interest rates without watching long-term rates fall any further. One way to do this might be for policy makers to lift their projections of what they think overnight rates will be in the long term – their just-right rate of where rates should be when the economy is neither too hot nor too cold. Wednesday, they left this figure at 2.5% but, given the economy's recent resilience, it is reasonable to think it might be higher. At the least, they could start talking up the possibility that rates will need to settle in at a higher level than before the pandemic.
As it stands, though, the Fed is facing a situation in which rates could simultaneously be too high and too low.
Now that inflation looks beaten, the Fed is refocused on avoiding a recession and navigating us to the so-called "soft landing." Here's more from the WSJ: The Fed Underwrites the Recovery. Excerpt:
The Federal Reserve has two mandates: inflation and unemployment. For two years, though, it behaved as if only the first mattered, raising interest rates so steeply that it knew it was courting recession.
This week, it pivoted. "You're getting now back to the point where both mandates are important," Fed Chair Jerome Powell told reporters Wednesday after the central bank's meeting. "We'll be very much keeping that in mind as we make policy going forward."
This pivot means the Fed is ready to backstop the economic recovery. It doesn't rule out a recession, but makes one much less likely.
Officially, the Fed is still unsatisfied with inflation, which Powell said remains too high. Officially, it says it's more likely to raise rates than cut them at their next few meetings.
Unofficially, the Fed thinks inflation, which has fallen much faster than almost anyone expected, will be in the vicinity of its 2% target before long, and the priority in the coming year will be lowering rates enough to prevent a recession.
There's a saying on Wall Street that's usually correct: "Don't fight the Fed"...
I think those are wise words to keep in mind today. After being caught flat-footed by the spike in inflation in 2021 and the first half of 2022, the Fed has been doing all the right things – triggering a steep decline in inflation without the widely expected recession and surge in unemployment. My money is on the Fed going forward...
2) Here's another piece of good economic news in the WSJ: U.S. Retail Sales Show Holiday Season Off to Strong Start. Excerpt:
Consumers showed unexpected strength at the start of the holiday shopping season, suggesting Americans are well-positioned to support continued economic growth.
Retail sales, which include spending at stores, restaurants, dealerships and online, rose a seasonally adjusted 0.3% in November from the month before, the Commerce Department said Thursday. That was a rebound from October's downwardly revised 0.2% decline and a surprise to economists who had expected sales to fall again last month.
Excluding gasoline and auto sales, retail spending rose 0.6% last month from October, after increasing just 0.1% the prior month, suggesting Americans are shopping and dining out to start the holiday season.
Overall sales rose 4.1% in November from a year earlier, outpacing cooling inflation.
3) However, even when the skies are mostly sunny (as they are today), there are always a few dark clouds to keep an eye on...
In the case of our long-term economic health, I'm concerned about the large deficits the government is running, which has led our debt-to-GDP ratio to steadily increase. I wrote at length about this in my October 23 e-mail – here's an excerpt:
Many bearish investors think America's national debt is going to cause a crisis and are thus positioning themselves defensively in the market.
It is indeed high and rapidly rising, doubling from roughly $1 trillion in 2022 to $2 trillion in 2023 (per this New York Times article: U.S. Deficit, Pegged at $1.7 Trillion, Effectively Doubled in 2023). As a result, our government debt to GDP is fourth highest among [the Organization for Economic Cooperation and Development] countries, as you can see from this chart I presented at the Stansberry Research conference in Las Vegas:
I agree that this is a problem we need to address – but I don't think a calamity is imminent, so it's not affecting my generally constructive outlook for stocks.
One reason for my complacency is that when I was running a hedge fund more than a decade ago I put on a trade that would pay off if Japan had a debt crisis. Japan's debt to GDP was similar to America's today and appeared unsustainable – yet despite nearly doubling since then, there has been no crisis. (It seems like every self-respecting hedge fund manager has, at some point, put this trade on and lost their money – so much so that it has a name in the industry: "The Widowmaker.") And we're in a much better position than Japan as we boast the world's reserve currency, better demographics, and a more vibrant, growing economy.
Another reason is that, if needed, the U.S. has the ability to raise taxes to reduce the deficit and/or pay down debt.
Here's an interesting chart Bloomberg's Lisa Abramowicz posted that helped me better understand the sources of our deficit:
4) In yesterday's e-mail, I wrote:
There are dozens of things that are required to be a successful investor – including the ability to understand businesses and financial statements, value a company, control one's emotions, manage a portfolio effectively, etc.
But if I had to name one that's more important than anything else, it's the ability to identify great businesses – ideally early on, before everyone else does so and they are valued at hundreds of billions of dollars.
And what better way to develop this skill than to study the greatest businesses of all time?
Another key to investment success is studying great investors – and one of the best is my old friend Leon Cooperman, who far outpaced the market managing hedge fund Omega Advisors from 1991 to 2016.
A few days ago, he did an in-depth 49-minute interview with Ari Melber on MSNBC. In it, he shared his life story growing up in the Bronx, being the son of a Polish immigrant plumber, reaching great heights at Goldman Sachs (GS) and in the hedge-fund world, and his commitment to philanthropy: Billionaire Leon Cooperman on Trump, Bezos plot, Taxes, and Israel.
Cooperman was always known as one of the hardest working people in the business, driven by this proverb he likes to repeat:
Every morning in Africa, a gazelle wakes up. It knows it must outrun the fastest lion or it will be killed. Every morning in Africa, a lion wakes up. It knows it must run faster than the slowest gazelle or it will starve. It doesn't matter whether you are the lion or a gazelle – when the sun comes up, you'd better be running.
5) This afternoon, my wife Susan and I are flying to Kenya to spend the holidays with my parents, sister, and her son.
"But wait," you might ask, "didn't you just get back from Africa two and a half weeks ago?"
Yes, but that was a different family trip – with all three of our daughters who, sadly, can't join us on this trip – and to a different part of Africa (Botswana, Namibia, and South Africa).
Susan and I will be spending the first five days at my parents' house outside of Nairobi and then the last 10 days at their beach house on the coast on Lamu Island.
We plan to visit my old friend Kennedy Odede, his wife Jessica Posner Odede, and the wonderful charity they started, Shining Hope for Communities ("SHOFCO"), in Nairobi's Kibera slum. New York Times columnist Nicholas Kristof wrote about it earlier this year in this op-ed: This Kenyan Slum Has Something to Teach the World. Excerpt:
SHOFCO has spread through low-income communities across Kenya and now boasts 2.4 million members, making it one of the largest grass-roots organizations in Africa. It provides clean water, fights sexual assault, runs a credit union, coaches people on starting small businesses, runs libraries and internet hot spots, mobilizes voters to press politicians to bring services to slums, runs public health campaigns and does 1,000 other things.
Susan and I last visited in December 2012 – here are pictures:
And here's a picture of our youngest daughter, Katharine, with Kennedy and Jessica in October 2015, a month after she raised $20,000 for SHOFCO as part of her bat mitzvah a month earlier.
This was at a book party in New York City for Kennedy's wonderful book, telling the story of his life and starting SHOFCO: Find Me Unafraid: Love, Loss, and Hope in an African Slum.
I won't be totally off the grid, of course... just in another part of the world!
Of course, some readers might wonder how I keep up with these daily e-mails when I'm traveling or in another time zone...
In the roughly two decades that I've been writing them, I've never turned my pen over to anyone – not even for a single day.
There's Internet access nearly everywhere on Earth these days (both a blessing and a curse!). In recent years, I've been to countries like Uzbekistan, Ecuador, and Rwanda, and never went more than a couple of hours without a connection.
Again, it's a blessing (I'm entertained and educated) and a curse (I might not be fully present wherever I am), but it works for me!
I'll share the full recap from my Kenya trip after I return... so stay tuned for those details after the holidays!
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.