Welcome to trade ideas
I'm Jake Merle sitting down with Tony Greer
Editor of the morning navigator Tony great to have you back on the show for having me man
So we just saw the first rate cut in over a decade Powell. Just got done giving a speech and
Personally, this is the first rate cut. I've seen. Yeah, I know I'm a student of the markets
Just getting into the markets and I want to get your thoughts. Is this a good thing a bad thing? What's going on?
Yeah
We should I guess we should set it up with some history since you're student of the market right last time the Fed cut rates
We were addressing
The housing crisis, right?
So we started off with Fed Funds at five and a quarter and wound up lowering that them to zero
Over the course of I think just over a year and during that time the market got shellacked
Right because the stock market was then can falling into the mortgage crisis. We were dealing with
Excuse me. We're dealing with Bear Stearns. We were dealing with Lehman Brothers going bankrupt the whole thing
We had a much different economic background as well. You know, we had higher oil prices. We had oil prices up in 95
So we had higher interest rates at around four percent in the ten year. So things were much different, right?
We were we were addressing then what was coming out of a crisis right now. We're not coming out of any crisis, right? What seems
It seems like a sort of smartly prudent rate cut to me believe it or not
And this is a little bit of a change of opinion for me, right?
I originally thought that Powell was 100% beholden to Trump for this rate cut, right? I mean he literally seemed
optically like he was just
Caving to the president pointing around the world saying being a complete baby the way he knows to be everybody else gets lower rates
Why we have such high interest rates President Obama got zero interest rates for his whole ten-year
Why do I have to have 3% interest rates, you know?
So he conflates these stories out of nothing and starts putting pressure on the Fed Chairman and that's when you know
We saw even more of a dovish pivot
but we saw that goal the dovish pivot go around the world and it was really in a reaction to a collapse in the
Manufacturing sector, which was really evident like you can see them right go right around the world for Europe to China, you know
We saw PMI stick down from either the mid 50s to high 50s
To the low 50s and then some into the 40s now as you know that you know p.m
Eyes, we judge economic expansion and contraction as being either north of south of 50
So we've seen Europe already go into economic contraction due to the trade wars right at this point
We've seen the market falter right when we have fears of trade wars tipping
Equity earnings over and having a negative effect on the economy. So what do we have every time we see that?
The u.s. Gov to the rescue, right? Like we saw Steve minuchin back in December
The government comes to the rescue says there's going to be plenty of liquidity at all the banks and the market was manages to recover
so the mat market gets back on its own feet and
We go into earnings season and earnings start coming out positively and then the SP can continue to run from there
So while it seems completely absurd that we are cutting rates
with the stock market at an all-time high and with unemployment at 3.7 percent and with PMI, even at
51.7 indicating expansion and no sign of inflation. It does seem like
preemptively a smart idea considering
the ECB just turned full dove right after in response to their PMI is coming off if
There's no pivot by the Fed then we wind up with a you know
widen the interest rate differential with us over a several other countries and probably a strengthening dollar right and in a really
Super strong dollar is gonna hurt our exporters something that the president doesn't want to me
we can't be the
outstanding hawk on the planet right now because it would just
Topple too much within the system which seems to be going along with just fine right now one of the things that's interesting that Powell
Said was that they're not gonna change
They're not gonna cut the balance sheet down any more from here right to me that that's directly addressing the fact
That's that's for Trump. Right? That's to say that okay
Look, we're gonna leave the balance sheet right where it is
So that it doesn't mess with the stock market the 25 basis point cut seems like it's rational in response to p.m
Eyes around the world coming down and US PMI coming back. So if we
Fall below 50 and start seeing drag on economic data. They will look smart and have said, okay
we're a little bit ahead of this and
As you would have expected
He left the door open for another rate cut
And the reason that he has to do that in my opinion
There's no way that the Fed can almost never anymore signal that they're done for good cutting rates
because then their risk is
They say that they're done cutting rates the economics of the u.s. Stay sideways too firm and the stock market backs off
Now, what do you think? They're gonna have to do if the stock market backs off? They're gonna have to cut rates
Are they gonna have to go there do something?
So to me, it makes sense for them to say yeah that you know
We will address as time goes by we'll make it data dependent, but they definitely didn't rule out another rate cut
So it seems to me now as the markets go
It seems like the equity market is probably gonna go by business as usual, right?
I mean there's a little bit of a dip today in response to
It's probably sell the fact type of response where we were expecting a quarter of a point
We got a quarter of a point. Nobody knows really what's gonna happen next
So let's probably take profits on the stocks that we've bought in the last three to six weeks at least right?
So that move doesn't scare me
And nor it is it I'm not gonna be one of those guys that's out there saying, okay
Here comes the big tumble right rather
I would be looking to posture myself to buy a dip in this environment if we get an SMP pullback - it's moving averages
I would certainly take a chance and look for the stocks that I want to get long and buy them
Will that be the 50-day moving average 200-day?
Yeah
somewhere in there depending on how fast it gets there right rate of change is everything so if we fall down there and the next
You know two sessions. I might be a little hesitant if it takes us two weeks
To sort of back and fill into that area then I think it's a good idea to you know
Sort of do some shopping and get a little bit longer the stocks that you want to buy or put a new length on
In stocks that you've been looking at and and have you had on your radar
So I think that's the way that I'm gonna play it. I've still got a
fairly outsized bond short position on for me
And I'm trafficking right now in IEF. That's the seven to 10-year Treasury ETF
My premise for the bond short was that interest rates had fallen too far?
given the strength of the economy
Right all of a sudden it seemed to me like the Fed was on hold and then they said okay
we're gonna respond to changes in market and we saw some economic weakness abroad and
Bonds just went on a run and absolutely, you know knocked interest rates much lower across the curve
But we're still sort of being sensitive and I think that the Fed is also being sensitive to that curve
Right because the big alarm that everybody watches is the three-month ten-year spread
Three-month ten-year spread touched down at zero in March of this year
When that spread touches zero agos inverted a recession has followed more often than not right
So I think the Fed is saying, you know, we're seeing numbers come off abroad. We've got this three months ten months three month
ten-year spread as a little bit of an alarm going off in the office saying there's usually
Recession that follows this and so maybe they're being prudent and following along with that narrative in their rate cut
So the bond market to me
This is going to be another test
I mean since I'm in the 10-year part of the curve, I'm gonna talk about that
But to me, this is gonna be the ultimate test of 2% in the 10-year
I've been calling it the Battle of two percent right rates came from a high of about three and a quarter or so
Came tanking down to 2% in the 10-year and so far we've been sideways, right? So I'm looking for more and more
data in the US to sort of hold steady or
Maybe even improve and to catch the bond market which has gotten overly overly optimistic and bullish off
Sides to a point where the bond market has to sell-off and 10-year yields have to trade up higher
So this isn't a generational trade, right? This is just a feeling that the bond market is overbought
Sentiment is overly bullish
Everybody is positioned long
And so let's take a chance at fading that and seeing if the US economy stays sideways and we have a chance at rates
Retracing to where they came from. So that's basically the way I'm playing it
It feels like stocks can probably hold the dip and go on rallying business as usual, right the Fang complex is still
Driving the markets and you know performing fairly well
So would that be a short-term trade or you bullish on the markets in general for more of a longer-term picture as well?
Yeah, I mean
You know my timeframes Jake are usually somewhere from you know
Trading timeframes or a week to two months and investment timeframes are sort of three months to a year
Maybe a little bit beyond kind of thing
You know if you get lucky and something really continues to perform but for a bond trade
This is something that's very tactical right where I am, right?
I
You know yields fell to 2% I put the trade on at this level and
Sort of when they break if bonds rally and break through 2% That's where I get out
So I'm not risking a large amount of money at all
I just kind of waited for them to get to this level
I sold Treasuries via the ETF and I'm gonna see what happens now, but
Most importantly. Like I said, I think that the equity market can probably sustain this
I feel like no matter
What if there is another steep pullback in equities that we're gonna hear from Steve minuchin again?
I mean, they're not gonna change the game plan at the White House or at the Treasury, you know
The goal is the stock market to continue up into the right and it seems like President Trump continues to get his way
So that's my wrap-up. I mean as long as I
Originally thought it was really Trump induced rate cut
and now I feel like it might be just the prudent thing to do for markets and
The thing about the balance sheet to me that's saying that they don't want to do anything. That's gonna
Cause anything to raise rates in any way?
Which the balance sheet tapering could do and I think that's sort of another throw in for
Trump so that he can know that they're not going to tamper with the balance sheet
And so that's where we are now
I think it might be business as usual for stocks and I'm gonna keep fighting this bond short for as long as I can
so we just saw Powell speak and actually the Dow fell about
400 points during his press conference as he was talking about
This may be a one and done type of a rate cut and during a mid cycle
But let's say the data does stabilize and we don't get more rate cuts
Is it back to you know bad is good good is bad. How do you see it playing out then?
It goes back to listening to what Trump wants quite honestly if you ask me
I mean, I think it's I think that the sort of bounce off of the lows
You know when there was some iteration of Powell saying that we may be being a one-and-done rate cut situation
I think that may have been coincident sold type of thing
I'm really all about where the market closes on the day. And I think that once all is said and done today
It will look just like a sell the fact sell-off in stocks where it's nothing fatal
But it proves to be a reason for stocks to pull back off the all-time highs, right?
It's not like we're having a pullback from mid. It's not like we're plunging to lower levels
We are simply having a pullback from the all-time high so
You know in as much as the president wants to keep that going
Say that it that the situation stabilizes the economy stabilizes and there's no rate move in either direction
If central banks around the world continue on their dovish path and lowering interest rates, you will hear from the president
Pressuring the Fed right? And we've also got to see what happens with trade wars, right?
Because the tariff war does not look like it's gonna end anytime soon
We just spent about a half of a year
in a positive feedback loop in the stock market where the stock market rallied every time there was a sniff of
talks about
Trade tariffs and coming to any kind of a you know negotiation
situation
That turned out to be completely false, right?
Like there are no there is no imminent solution to the rate talk. So in as much as this is something that continues on
It continues to put pressure on European and perhaps the Chinese economy
They continue to lower rates in response
It would not be outrageous to watch the Federal Reserve have to pivot back dovish again and say you know what?
We don't want to be the outlier here because that's what it's become. You know, that's what it's become
There's no longer a the US economy is fine
we don't need to change rates right in the FOMC statement Powell actually mentioned things like the brexit and
The debt ceiling as reasons for concern and that's when I want to you know
Grab the television screen and go are you kidding me? You know, that kind of thing is that rages to me?
So we're not managing our own economy with our own interest rates or our own currency within our own borders
So it seemed like we should be most attentive to what's going on here
That's not the case anymore
so that's why you've got to watch and see what's going on around the world because it seems like the
Powers that be or the central banks have done a pretty masterful job at managing
Coordinated currency destruction, right? We're all lowering rates around the world at the same time and it's everybody in the boat
so the dollar has been sort of the
stock absorber, that's right in the middle and sort of does it really rally meanwhile this and
Existential battle going on on fin 2 it every day about whether the dollar remains a reserve currency or not
You know, so to me the central banks are making it pretty clear that it's gonna stay exactly where it is
Especially if you have you know countries like Japan pinning rates to zero, etc, etc
So that's my view from here Jake
And so there is a weak global growth. We've seen in Europe if you across the globe
Are you worried about a recession here in the United States? Yeah only because I don't want to blow off the bond market, right?
That's that's my thing. I don't know. I will never know. I am NOT capable of predicting
All I can do is read the signals and look at history and decide if I want to trade on them, rhyming or not
Right, so I'm really I don't look out my window and feel a recession or I don't see one, you know
It's still tough to get a steak reservation in New York City on a Tuesday night
So maybe this isn't a good place to look for a recession, etc
But I don't really see us slipping into one
The way corporate earnings have been the way you know, it feels like the economy is hanging in there
It feels like the technology side of the economy is really booming
And now the transport side of the economy is starting to boom again while other sides of the economy are slowing down
As long as the consumer remains strong which we've been and we've got exceedingly high consumer confidence across the board
I don't see it yet. I don't see it yet
I'm not gonna say that it's not gonna happen and my eyes are wide open and I'm ready to trade it
But I don't see evidence of it yet
I really don't so we have to watch the spread and see if the bond market stays where it is with the three-month ten
Ten-year spread either flat or inverted and to see if that's proven the same as the last two times whereas after
2000 and 2007 where a nominal tea GDP took a tumble right after that
But it doesn't seem like we're set up for the same situation because we don't have two crises to put us out of anymore. So
Unless there's one that I'm not catching yet. All right, Cody. Thanks for breaking it down for us
We'll see how it plays out in months to come. Thanks so much for joining us. You're welcome Jake. That was great
you
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