“The stupider one is, the closer one is to reality. The stupider one is, the clearer one is. Stupidity is brief and artless, while intelligence wriggles and hides itself. Intelligence is a knave, but stupidity is honest and straightforward.” –Fyodor Karamazov, in Dostoevsky’s The Brothers Karamazov
The Karamazov father in Dostoevsky’s seminal novel is always promising to change his shameless ways. The only problem is that he never does, and soon enough, it becomes clear that Fyodor Karamazov is incapable of telling the truth. He cannot even confess something to a priest without changing his story in the same breath. So it comes as no surprise that, eventually, no one believes what he says anymore.
Here is a headline from January about the Federal Reserve: “Fed Policy is Looking Hawkish” (hawkish meaning the Fed will raise interest rates). No rate hike. How about March? “Wall Street in for a Hawkish Surprise: Goldman.” No rate hike. May? “Fed likely to hike in June if data improve: Minutes.” Was the data good in June? From CNBC, “US created 287K jobs in June vs. 175K expected.” That sounds good! No rate hike. Shall I go on?
The refrain is always the same: the economy is great! It’s humming along! The Fed is, time and again, “inclined” to raise rates. Then they don’t. There’s always a stated reason, of course: first it was China not doing well, then the first quarter growth was not so great, then Brexit came, and so on. But like any relationship expert will tell you, if your friend keeps finding a reason why he or she can’t make lunch, they probably don’t want to come to lunch.
Then, of course, there is the speculation that an implicit agreement was made at the G-20 (meetings between 20 major countries) in February. The rest of the world had been devaluing their currencies like crazy, from Japan trying to crash the yen to Europe trying to push the euro down slowly. Late last year the Chinese entered the picture, sending their yuan tumbling, and they threatened to keep the spigots on if everyone else kept up their act. Of course, a rising dollar is also a problem for emerging markets because it puts strains on their dollar-denominated debts—and they have plenty of those. So what was the deal, according to many? Supposedly, all the central banks agreed not to step on each other’s toes.
Since February, the European Central Bank has been quiet. The Bank of Japan has done nothing. The People’s Bank of China has stayed silent. You know who else has done nothing since February? The Federal Reserve.
The market keeps moving up and down, thinking and worrying about the next rate hike. Here is a chart of Fed futures from Fed Watch, which basically is trying to predict whether the Fed will raise rates in September:
Looks like someone—or rather everyone—in the markets is having trouble making heads or tails of what in the world the Fed will do.
So at what point do we stop assuming the Fed really wants to raise rates but that random events keep getting in the way? At what point does the Fed become Fyodor Karamazov? At what point do we accept that when they tell us they want to raise rates, they really don’t want to raise rates?
And if we accept that, then what? What investing strategy do we use if the old one of waiting every month to see what the Fed does becomes a fool’s errand?
Maybe we need a little less intelligence? After all, the intelligent course of action—waiting on the statements of the geniuses at the Federal Reserve—seems to be doing exactly what good old Fyodor predicted it would: it’s wiggling around and going in circles. The chart above is a symbol of the models of intelligent minds, but it’s not particularly useful. Perhaps we need to think about simpler things.
Perhaps we need a bit more stupidity.
Your BTA analyst,