I don’t know if you watched J Powell’s Q&A following the Fed’s decision to cut rates 25bps. It was another “hawkish cut”, prompting a small sell-off in both stocks and bonds, which must have been surprised that a December cut was “not a foregone conclusion”. We found JP’s remarks riveting, although not always for good reason. Did you catch “short-lie-ved” with respect to the impact of tariffs on inflation? Of course, it’s uncharitable to focus on trivial spoken errors when there were more substantive statements to focus on. The FOMC decision had two dissents: one from Stephen Miran, who wanted 50bps, and one from Kansas City Fed’s Jeff Schmid, who felt inflation was too high to permit any rate cut.
We suspect they will cut again, partly from political expediency, but also because of the increasing number of bezzles which are now emerging. Jamie Dimon (apparently an expert in pest control) pointed out that credit allocators might want to take a little extra care right now, which might have a chilling effect on the flow of credit. The latest bezzle victim was Blackrock, who one might think should have known better. What was striking about BlackRock’s misfortune was that it appears to have been a compound bezzle. BlackRock paid $12bn for HPS in July of this year, as a short cut to scale in the private credit. With the benefit of hindsight, we can safely assume HPS wasn’t bought for its thorough due diligence, as HPS managed to lend $552.6mn to Carriox Capital, run by Mr. Bankim Brahmbhatt. No doubt, Mr. Brahmbhatt has many gifts, but we remain a little surprised he managed to sidestep HPS verification processes. Still, it’s probably just a one-off, like Tricolor, First Brands and Primalend. One might argue that whether it is a one-off (idiosyncratic) or a “canary in the coalmine” will ultimately depend on what the Fed does.
Returning to the Powell presser, we were particularly struck by his comments about consumption and wealth effects. Jennifer Schonberger asked about the bifurcated economy and how much of consumer spending hinges on the stock market remaining strong. Powell seemed to argue that you can have your cake and eat it. That stock price appreciation has boosted consumption via wealth effects, but the boost is not significant, even if overall consumption trends remain surprisingly strong relative to wage growth. Still, if stock prices were to reverse, we would find out soon enough. Powell reminded us of Linus van Pelt’s belief in the Great Pumpkin. He didn’t have to justify it, and it didn’t need to make sense.
Anyone can be embarrassed by markets and market predictions. Indeed, it isn’t even always obvious whether it’s more embarrassing to be right about markets than wrong. And it’s easy to get speculation either very wrong or very right. But if you want to explain why consumption has been surprisingly strong, whatever explains it is likely to also be important should it reverse.
Perhaps sometimes it’s just politically expedient to avoid the obvious conclusion. And who can be faulted for political expediency?
