The Fed seems to have head-in-the-sand

The Fed is going to cut rates next week and that hangs some weight on the tail of the dollar. We are not out of the woods yet, with the signals mixed for the majors—sterling and the euro. The key driver is the 10-year yield which has now recovered, with the stock market looking increasingly like a bubble. The Nasdaq has hit a record high and the S&P is still making new record highs, as though the rate cut and AI are all that matter. Trump is not on the horizon yet for the equity gangs, which continue to expect nice earnings going forward. We say this is head-in-the-sand.

The Fed seems to have head-in-the-sand, too, but markets are acknowledging that rate cuts next year are going to be pared back. Expectations are down to only two cuts in 2025.

Reuters has dandy chart summarizing the state of play. You can’t forecast FX prices based on the relative rates and expected relative rates because that mysterious thing named sentiment is more complicated, but it’s not a bad starting point.

Wild cards abound. Will the Chinese stimulus package be big enough and detailed enough to change minds, including domestic household minds? Will Pres Xi turn up for the Trump inauguration? The Economist says “There hasn’t been a foreign head of state at such an event in at least a century, let alone one from a country that America regards as unfriendly, to say the least.” Is there really going to be giant tariffs and even a trade war? A trade war with Canada is unthinkable, but Canada is thinking about export taxes on a ton of stuff we buy from them. That takes real guts. Also taking real guts would be the Fed not cutting rates at all in Q1 on expectations of tariff-driven inflation.

Central Bank meetings

RBA December 9-10.

BoC December 11.

ECB December 12.

SNB December 12.

Fed December 18.

BoE December 19.

Bank of Japan Dec 19.

Forecast

The dollar may wobble going into the rate cut next week but overall, has the advantage longer term, as well as its role as a safe haven when the world goes bonkers, even if the crazy comes from the US itself, as we saw during the first Trump years.

Tidbit: Standard Chartered economist Graham evaluated the Trump effect of the cohesiveness of the eurozone, which tends to improve during crises. This time the reaction to Trump may depend on how much any country’s trade is affected. Along the way, he includes this chart of deficits, replicated by Bloomberg. It’s something to tuck away. One argument is that the pending Trump crisis, not only trade but defense, will allows fiscal wiggle room. Well, only four countries actually have any.

Tidbit: We are avoiding wasting time on Trump stories but to the extent foreign investment managers are watching US cable news and commentary, conditions are getting worse by the hour. Candidate for top positions are, almost without exception, stunningly unqualified—but the Senators who have the job of examining qualifications and appropriateness are being threatened by Trump at their next election and showing cowardice.

In addition, yesterday Trump said tariffs will not raise prices and grocery prices will not go up (although he can’t guarantee anything). The unwillingness to accept Facts and Evidence is astounding. This is like seeing the tornado in the next cornfield but hoping it won’t hit your barn. We are saving many hours every day by just not watching TV news.

Tidbit: The murder of a health insurance CEO has aroused tremendous public attention. The murderer is viewed by thousands as a vigilante hero. They have sent money for his defense, and are selling T-shirts. It doesn’t hurt that the guy is handsome and fit, and the insurance company let him down on a serious back problem. Che Guevera, anyone? The health insurance company is indeed harmful to its subscribers in the quest for profit—it rejects 32% of claims, the industry high.

It’s also true that efforts to scam and cheat insurance companies is pretty high in the US, but using AI to evaluate claims seems wrong-headed. Public officials wring their hands but any push for better regulation has all but vanished. Instead, private security companies are doing terrific business protecting execs. What’s wrong with this picture?

This is probably the biggest social scandal since Floyd George. British and Europeans, rightly,  look down their noses at gun violence in the US and are thankful they have national health insurance programs. We like to think it’s only access to guns that makes the US murder rate so high compared to other places. Gun control is off the table for another four years (at least).

What are the numbers? A selection of murders per 100,000 population in 2024:

US: 6.81.

Canada: 2,09.

UK: 1.17.

Germany: 0.83.

Italy: 0.51.

Switzerland: 0.48.

Mexico: 28.8.

When it comes to international finance, so what? The perception of the US as a safe sovereign for investors may be damaged a bit, but more important to investors is likely the corruption index from Transparency International. With Trump and his expected cabinet on the grift using power to peddle crap to get money for themselves (golden sneakers! $60 Bibles you can buy online for $3.50!, $50 watches for $10,000!), this is about to change.

The US ranking will fall. Now it’s a ranking of 69, compared to 100 as “very clean.”  (https://www.transparency.org/e...). The US is less clean than the UK, Austria and France, all at 71.

Here are the top names:

We look at these rankings every couple of years. The implication now is that on the margin, foreign direct investment will fall from honorable investors and rise from the crooks.

Probably both are minor issues to those who see yield and rate of return as the only criteria. But we are not so sure. The US is looking more and more like a banana republic.

Note to Readers: We will have full reports tomorrow but no reports next Monday through Wednesday, returning on Thursday. 

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