Market Notes

August 5, 2019

Eagle, Colorado

The Federal Reserve Bank provided plenty of fireworks to end the month of July. On the 31st, they finished their policy meeting with a cutting of interest rates by 0.25% meaning that the rate banks pay each other for overnight loans went down. The idea is that the banks will pass this savings on to borrowers in the form of cheaper mortgages and construction loans this stimulating hiring and price inflation. I use “price inflation” specifically to mean an increase in consumer prices, not the traditional definition of inflation which is simply:

“An increase in the money supply in excess of domestic savings and foreign investment.”

Good luck, Mr. Powell.

Last week, I bought a new cover for my putter (golf club) for $10 from It arrived in 2 days and it’s amazingly well-built. I would have expected to pay $20 for something so well-made. But this is not how it works anymore. Things are cheap in terms of dollars. And as American’s we take this for granted. We expect that when we hop on tomorrow, this item will be roughly the same price - again in terms of dollars. Folks in other countries have no such expectation. We Americans are extremely lucky to own the world’s reserve currency and that there so much demand for our currency.

Anyway, this leads me to another point about currency manipulators and the strength of the dollar in the face of the Fed cutting interest rates (which should lead to a decline in the dollar but has not). I will hear these complaints about currency manipulation as soon as the USA calls over to the IMF and says.

“Hey, we forfeit our position as the world’s reserve currency. We don’t want the job anymore.”

If you really wanted to weaken the dollar, you probably wouldn’t have to do much more than that. You could also default on a couple US Treasury payments. That would likely do the trick too. But nobody is talking about any of this. The USA is the master currency manipulator – have you heard of TARP? The value of a dollar is driven buy supply of the dollar vs demand for the dollar. With the US Dollar representing 63% of the world reserve currency basket, demand for dollars is as high as it has ever been.

With that said, the S&P 500 still finished July up 1.31% even after falling 1.09% on the final day of the month, on the heels of the Fed decision and press conference with Chair Powell. From Grant’s Interest Rate Observer:

“Fed chair Jerome Powell accomplished the seemingly impossible today: he cut rates, announced the early end of balance sheet run-off AND disappointed markets.”

If you don’t already, I encourage you to subscribe to their almost daily email.

Finally, with the Fed now cutting rates, we are a little concerned about what they see coming. On July 19th, I created the image below from the St. Louis FRED website:

If you look closely, you’ll see that the fed actually cut rates into the past several (shaded) recessions. And now they have begun a new round of rate cutting for the first time since the last recession.

I will leave you with a memo that is much better than mine… The legendary Howard Marks posted a new memo on July 26th that I think is a must-read for anyone who is interested in the Fed’s activities and impacts on markets and lives around the world.

For example, from the memo - this cartoon is 38 years old:

His prior memo from June 12th is also a great read if you missed that one.

Thanks for reading!

Shane Fleury

Chief Investment Officer


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