“Spend each day trying to be a little wiser than you were when you wake up.” Charlie Munger
As the sad announcement was made yesterday that Charlie Munger, Warren Buffet’s right-hand man over many years, passed away at the age of 99. I am reminded of one of the sage’s most famous comments, “When others get greedy it’s time to get fearful”. I am not sure at present everyone is in the greedy camp but it is clear investors are becoming more and more optimistic for next year, the recent drive to put capital into riskier assets has continued. The basic premise for this optimism, the US economy will slow just enough to allow the Fed to start to ease monetary policy, but not so much to cause a deep recession. Bill Ackerman is the latest high-profile investor to predict the Fed will begin cutting rates sooner than expected. He believes even as soon as the first quarter. Markets are currently pricing in June for the first cut to US interest rates. Mr Ackerman points out, as I have done on more than one occasion recently, that the real rate of interest keeps climbing as inflation keeps falling if interest rates stay where they are. Mr Ackerman is, to be fair, not convinced the US economy is indeed headed for a soft landing, in contrast to where consensus seems to be.
Bond investors have not had a good year, but like equity investors have had a good month, according to Bloomberg the best month since the 2008 crisis. The rally in stocks, bonds, and commodities was assisted yesterday as one of the Fed’s notorious hawks, Chris Waller, sees the current level of interest rates are high enough to slow the economy down enough to get inflation back to the target of 2%.
We could be back into the bad economic news world is good news for stocks and bonds as it will increase speculation that this will further add to the view the Fed will start cutting faster and harder than the market expects. One has to also bear in mind the Fed was slow to raise and then went hard, one could easily see the same in reverse. The Fed is slow to cut but then when there are genuine signs that inflation is heading back to 2%, or even the ogre of disinflation, the Fed will cut aggressively. Better late than never seems to be their strapline.
Over the coming weeks, we will get more strategists and economists coming out with their forecasts for the coming year. One thing that may be on the Fed’s mind in 2024 is the Presidential election. Would the Fed want to be at risk of being accused of unduly influencing the election if they wait till later in the year to start easing monetary policy?