Interest rates may be tradable, and God knows the markets love turning every central bank cough into a full-blown drama, but the bigger question is whether rates at current levels are genuinely restrictive enough to damage economic growth.
There is always an obvious interest in interest rates because most of us, and most of our countries, are up to our necks in debt. But I still doubt anyone can seriously argue that a quarter-point rise or fall in borrowing costs is a bigger threat to our economic well-being than energy price shocks, wars, political stupidity, and the endless shenanigans coming out of governments that should know better.
Sure, we all want lower interest rates. Of course we do. But when you are my age, anything below 8%, which is where rates seemed to sit for much of my adult life, still looks workable. Not pleasant, perhaps, but workable.
Back then, of course, we had more responsible politicians, less welfare dependency, and we did not live in quite the same age of entitlement that today’s left-wing politicians are so fond of exploiting. I was lucky. As a younger man, I lived through a period when we were at least occasionally governed by people who used common sense, rather than taxpayers’ money, to buy votes.
God, how I miss the old days.
As for the new Fed Chairman, Kevin Warsh, I am happy enough to see a change at the top. But I hope he gives it a bit of time before he starts tinkering unnecessarily with rates. The last thing markets need is a man desperate to prove himself in his first few meetings by fiddling with the dials just because he can.
Anyway, let’s get back to the issue at hand: the markets.
I love seeing energy prices drop, but I am not yet convinced the war games in the Middle East are properly over. Oil around the mid-$70s looks better than the panic levels we have seen recently, but it is not exactly screaming “all clear”. Technically, the $75 area remains an important support zone, and if the current easing continues, we could see prices drift back toward the $68 level.
But I still lean toward caution.
If we get another shock out of the Middle East, oil could find upside pressure very quickly. I may even look to pick up a little oil exposure if prices become overextended on the downside. Nothing too large, and certainly nothing heroic, but I still cannot believe we are completely out of the woods when it comes to the Strait of Hormuz. Nor do I believe the damage done across the region over recent months will be cleaned up overnight. These things do not vanish just because politicians shake hands and photographers get excited.
Elsewhere, those who have followed me for some time will know I have a small stash of physical gold tucked away for a rainy day. Or more to the point, for the kind of emergency where European governments decide they need to “protect us” by trapping everyone inside some disastrous digital currency system.
I have held my gold for a few years, and while the drop since February’s giddy highs has reduced its value, I am not dumping any of it. In fact, if prices spike below $4,000, I may well add a little more. Gold is not a trade for me. It is insurance. And given the quality of political leadership we are currently blessed with, insurance still looks sensible.
I also held a bit of Bitcoin for a while, but luckily I was forced out on a rising stop when values dropped below $100,000 last autumn. I remain unconvinced, one way or the other, about the long-term future of crypto. I can see the arguments for it, and I can see the nonsense around it. Both sides have a point, which is irritating, because I prefer my markets to make life simple.
That said, I would probably be interested again somewhere around $55,000. Nothing major. I am not looking to become a crypto evangelist, start wearing a hoodie, and tell everyone fiat money is dead. But if Bitcoin sells off hard enough, that is the sort of level where I would start paying attention again. Whether it gets there is another matter. I am willing to wait, even if it means I miss the next rally.
On equities, you would be a fool to completely bet against AI taking values higher. The money is still flowing in that direction, and when that happens, prices can stretch much further than sensible people expect. But that does not mean the whole market is healthy. AI may be carrying the show, but the money has to come from somewhere, and that somewhere is often the rest of the market.
Further spikes over the coming weeks or months may well provide a decent selling opportunity. My preference would still be to sell European indices, especially the FTSE, for reasons I have laid out in previous reports. Europe remains heavy, slow, over-regulated, and politically confused. But we need to be careful. As they say on CNBC: “Bears make sense, but bulls make money.” Annoying, but often true.
And finally, the dollar.
My view has not changed much over the past year. No matter what people are saying about Trump, America, or the latest political circus, I still prefer the dollar over European currencies. There will be shocks, of course. We should also expect the midterms may not go Trump’s way. But I still believe he has done enough in the first part of this term to put the United States on a firmer economic footing than most of what we are seeing on this side of the pond.
No matter how bad Americans may think things are in the United States, believe me, Europe looks worse. The UK is struggling, the EU is sluggish, and the whole place feels weighed down by bureaucracy, ideology, and leaders who think prosperity can be legislated into existence. It cannot.
To be very honest, if I were younger, I would probably be out of here. But at my age, what is the point? I would only end up complaining somewhere warmer.
As a footnote, we had a good hit on commodities earlier this year. We bought early and took advantage of the excellent rallies that followed. Summer is not usually a great time for commodities, so I am not rushing back in now. But keep an eye on this sector. If we see further weakness, there may be another opportunity to get involved.
That is enough for this week.
Things remain up in the air politically, and nothing said or written should be relied upon as gospel. But opportunity remains. Short-term speculation is still paying off, provided the right risk management is used.
Just do not allow yourself to be dragged down the garden path by the opinions of others.
Including central bankers.
Please note the political opinions expressed above are those of the author himself, and do not necessarily reflect the opinions of JP Fund Services AS.
The post Rates Matter, But War, Oil and Politics Matter More first appeared on JP Fund Services.
The post Rates Matter, But War, Oil and Politics Matter More first appeared on trademakers.