Pro Perspectives 7/30/19

July 30, 2019

With tomorrow's big Fed decision looming, we heard from the Bank of Japan overnight. 
As the ECB did last week, the BOJ held the line on current policy, but stepped up the rhetoric on doing more.  
But as I've said, I suspect neither (the ECB nor the BOJ) will have to execute on the "doing more" rhetoric.   
Why?  A direction change from the Fed tomorrow (moving from tightening to easing) will likely be enough to turn the tide of global sentiment.  If a U.S./China trade deal follows, the next moves by the ECB and BOJ will be exiting emergency level policy, not plowing deeper into it.  
We will enter the Fed tomorrow with the 10-year yield hovering just above 2%.  That means banks are paying an annualized rate of about 50 basis points more to borrow money overnight (between banks) than the government is paying to borrow money for 10 years.
For perspective, in October of last year, the 10-year yield was 3.25% (125 basis points higher).  Two months later, the Fed hiked one last time — and the global financial markets clearly signaled that it was a mistake.  Stocks plunged.  Yields plunged.
Immediately following the December move by the Fed, we started looking at the similarities between 1994-1995 and 2018-2019.  And that script has played out perfectly.  
Remember, last year (2018) was the first year since 1994 that cash was the best producing major asset class (among stocks, real estate, bonds, gold).  And the culprit (in both 1994 and 2018) was an overly aggressive Fed tightening cycle in a low inflation recovering economy

The Fed ended up cutting rates in July of 1995 and spurring a huge run up in stocks (up 36%).  Here we are in July of 2019, and the Fed, again, is set to reverse course on rates.  We enter tomorrow's Fed meeting with stocks already up 20%. 


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