50!

The Buzz

The Federal Reserve Open Market Committee (FOMC) lowered its key overnight borrowing rate by 50 basis points, or half a percentage point, on Wednesday amid signs that inflation is moderating and the labor market is weakening. This was the Fed’s first interest rate reduction since the early days of the Covid pandemic. The decision lowers the target fed funds rate to a range of 4.75% – 5.00%. While the rate sets the short-term borrowing costs for banks, the cut spills into multiple products such as mortgages, auto loans and credit cards.

Except for emergency rate cuts during Covid, the last time the Fed cut rates by half a percentage point was in 2008 whilst in the midst of the Great Financial Crisis.

In its statement, the Federal Reserve declared, “The committee has gained greater confidence that inflation is moving sustainably toward 2 percent, and judged that the risks to achieving its employment and inflation goals are roughly in balance.”

Additionally, the FOMC indicated through its “dot plot” the expectation of 50 more basis points in rate cuts by year-end, much as the market has been pricing. The dot plot matrix of individual official’s expectations point to another full percentage point of rate cuts in 2025 and an additional half point reduction in 2026.

FOMC participants’ assessments of appropriate monetary policy. Midpoints of target range or target level for the federal funds rate.

In discussing the economy, the committee stated that “job gains have slowed and the unemployment rate has moved up but remains low.” The FOMC raised their expected unemployment rate for this year to 4.4% from its last update of 4.0% in June. The Fed also lowered its inflation outlook to 2.3% from 2.6% and dropped its core inflation projection 0.2% from June to 2.6%.

Trading was volatile after the Fed’s decision was announced. The Dow Jones Industrial Average gained 375 points, only to give it all up and close lower on the day.

Dow Jones Industrial Average

sources: QuikStrike, Bloomberg, CNBC. CME Group

Closing snapshot

source: ThinkOrSwim

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China

China is the world’s largest steel producer, responsible for more than one billion tons a year, which is over half of the world’s output. As China’s rise as a steel producer shook up the industry, its decline could be just as turbulent. Simply put, a domestic construction slump means there is too much steel and not enough domestic demand. The rest of the world is concerned that it will become a dumping ground for China’s excess production which could lower prices, drive plants out of business and cost workers jobs.

Unfortunately, China’s growth problem extends beyond steel. The country’s sagging economy is drawing comparison to Japan’s extended slump which began in the 1990s. According to survey of fund managers, growth expectations for China are the lowest they have been in decades. While it may not be there quite yet, the country is showing signs of recession: a prolonged period of deflation, property market declines and a large debt overhang. Similar to Japan, these events occurred following a period of stellar growth.

Researchers at Barclays argue that China is in some ways worse of than Japan was; facing a pronounced population decline, housing troubles and a prolonged economic slump. Overstretched household balance sheets could be a threat to recovery. Household debt has doubled in the past decade reaching 143% of disposable income in 2021 before stabilizing. In such a scenario, lowering interest rates don’t matter much. If household can’t earn enough, the ability to borrow is quite limited.

Any solutions intended to spur demand could be difficult to implement. While consumers could be incentivized to tap excess savings to boost consumptions, most of these savings are tied up in longer term time deposits; roughly 96% as of 2023.

Evidence shows that household prefer to hold deposits with maturities as long as five years in order to lock in higher interest rates amid speculation of lower rates in the future. It’s taken nearly 30 years for Japan to pull out of its economic slump. For reference, the asset value destroyed by Japan’s property downturn was $9 trillion, twice China’s equity market capitalization. Eerily, China’s stock market is looking a lot like Japan’s.

source: Bloomberg, John Authers, WSJ, Forbes, BofA, Barclays

“Nothing is more therapeutic than action.” – Robert Greene

The Mooch is bullish on Bitcoin

SkyBridge Capital LLC founder Anthony Scaramucci is predicting record highs for Bitcoin driven by a combination of interest-rate cuts and pro-crypto legislation in the “next congressional term in the U.S. Republican nominee Trump has adopted a pro-crypto stance in search of support and donations from the community amid a tight race with Vice President Harris, whose stance on digital assets is less clear.

Scaramucci is optimistic about the prospects of crypto rules under a Harris administration, citing discussion with the Democratic team behind her campaign. According to Bloomberg, last month an adviser to Harris signaled she will “back measures to help grow the industry while maintaining appropriate safeguards.”

Scaramucci believes the Federal Reserve will ultimately lower the target fed funds rate by at least 150 basis points over the next 18 months, a move that he views as “really good for asset prices in the U.S. and globally,” adding that Bitcoin could hit $100,000 by the end of the year. Following the FOMC’s decision to cut rates by 50 basis points, Bitcoin was trading around the $60,000 level.

sources: Bloomberg, WSJ

Exploding pagers kill several, wound thousands

Lebanon has accused Israel of orchestrating deadly pager blasts that have left several dead and thousands injured when their pagers exploded. From the moment the explosions occurred theories began to circulate about how devices considered outmoded in much of the world were turned deadly. One prevailing theory involved the possibility that the supply chain for the pagers had been compromised and that they had been engineered so their batteries would heat up until the devices exploded. However, cybersecurity expert Robert Graham dismissed this theory, stating that “making the batteries do anything more than burn is very hard and implausible. Far more plausible is that somebody bribed the factory to insert the explosives.”

Among other theories are that an electronic signal triggered the explosions. Hezbollah lawmaker Ibrahim Mousawi claims, “these pagers were detonated with high-tech by the Israeli enemy.” Israel neither confirmed nor denied the attack. The explosions are likely to ratchet up tension between Hezbollah, an Iran-back militant group and Israel. The two sides have been exchanging fire since the war in Gaza began almost a year ago.
sources: Bloomberg, WSJ, CNBC, X

In other news:

• Billionaire Mets owner Steve Cohen announced that he will stop trading for his Point72 hedge fund, though he will remain co-CIO with Harry Schwefel.

• Inflation in Canada fell to its slowest yearly pace since February 2021.

• Craigslist founder, Craig Newmark pledged $100 million to bolster cybersecurity in the U.S. Newmark believes that hacking by foreign governments is a major risk to the nation. About half of the money is earmarked for protecting infrastructure from cyber attacks while the rest will go towards educating people on the importance of simple safeguards.

sources: WSJ, CNBC, Bloomberg, Forbes

The stinger

Disclaimer

This letter is not offering investment, trading, or investment advice nor is based on any individual portfolio or business operation. We are are not a registered investment, stock nor commodity advisor. One should consult with their own registered advisor to discuss investment strategies that are appropriate for their business or personal goals, risk tolerance and financial situation. Information in this report and on any website is derived from a variety of source believed to be reliable however no representation is made that the information is accurate, complete or correct. These lessons, newsletter and site content is not intended nor shall not constitute or be construed as an offer or recommendation to “buy”, “sell”, “trade” or invest in any securities, commodities, futures, options or other asset referred to in said lessons, reports or newsletters. Rather, this research is intended to identify situations and circumstances that those in the trading community should be aware of to better help assess and improve their own risk management skills.