"Navigating By the Stars Under Cloudy Skies"

Nobody really knows anything about what is to come.

We don’t like that. We live in a cult of expertise, taking great comfort in the idea that although we are full of uncertainty there are wise people in various professions who can iron out the question marks and create definitive exclamations.

But it is a ruse.

This was exposed during the pandemic, when health experts stubbornly held onto uncertainty and even had the nerve to change recommendations based on evolving data despite the rest of us demanding binary answers. It is also the basis of almost every political campaign: Trust me, I can solve this for you.

Economics might be worse than any of these areas. As we’ve discussed before it is called “the dismal science” because of all of the variables, all of the uncertainty, that comes from predicting human nature. Harry Truman famously walked away from a meeting of economic advisors in which they all had said “on one hand… “ to couch their advice by declaring that what he really needed was a one-armed economist.

So it shouldn’t have been any surprise that Jerome Powell didn’t give us all the answers during his brief speech last week at Jackson Hole. It is perhaps a surprise that we thought he would. August is a pretty dull time of the year, and the Fed has capitalized on that in years past when it needed to get the market’s attention. But that is the exception, not the rule.

There’s an unstated belief out there that the masters of the universe can somehow read Fed tea leaves and see what direction everything is going. But if Powell doesn’t have a cheat sheet, or a secret code to set the market back to its 2% inflation target, we really should question those who would pretend they know the secrets about what the Fed is doing.

Nobody really knows anything.

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There’s a real arrogance to spending 500 words saying that people who pretend to be smart are just pretending to be smart, and then following that by explaining everything that is going on. But then again, I did pan predictions before making my own (wildly wrong) predictions for the year. So at least there is some consistency here.

Big Fed speeches, if done correctly, are like Rorschach tests. You hear what you want to hear. I’m just as guilty here as anyone. For me, the Powell speech only served to reinforce my existing beliefs about what is to come. And my read is there could be trouble up ahead for investors.

I don’t know how many more rate hikes are coming. I don’t know how or when the Fed will hit its inflation targets. I don’t know whether the remarkable employment numbers will prove to be sustainable or if we will hit a rough patch from here.

But the last few years and near-zero rates still feel more like an anomaly than a new normal, and there are still a lot of businesses with plans that are built around a world where money is free. Those are some of the stocks that have done best in 2023, in part thanks to a belief that Powell and the Fed will be cutting rates again in the coming months.

That’s just not going to happen. Don’t listen to anyone who tries to tell you what exactly the Fed Funds rate will be a year from now. But more likely than not, the rate will be in a range similar to where it is now. The new normal from two years ago wasn’t really a new normal; it was a short-term wave.

Investors need to ask themselves whether some of their high-flying positions can survive long-term if money does not become free again. If not, they might want to book some gains or cut their losses (depending on when you got in). I’m not buying much these days largely because it is hard (IMO) to find compelling value, and not because of any macro predictions. But as more people come around to the view that Powell is serious, that is beginning to change.

Powell gave that super-cool navigating by stars under cloudy skies line towards the end of the talk, reaffirming the Fed is not operating under a pre-planned script but instead will continue to adjust as new sightlines become available.

He closed with a simple message to the markets: “We will keep at it until the job is done.”

One would be wise to believe him.

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