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Rate Hikes to Rate Cuts in 8 Month

And just like that the school holidays are over. I celebrated another birthday, and the Pies won another flag - the best birthday present I could ask for, how good. My wife and I took the boys on a road trip for two weeks - up from Melbourne, through Glenrowan and Gundagai, up to Bondi, and down along the coast through Narooma, Jervis Bay, Pambula, and Lakes Entrance. We had such a blast, lot's of family time in nature, our thing.

It was the first time we took the Tesla on such a road trip. And for those who are unsure about the distance and charging, let me tell you, it works fine. It took us two lots of charges between Melbourne and Sydney (same on the way back), each taking between 20 - 30 minutes each (Tesla super charger) and cost about $25 each time. If you want to know more, hit me up, I'd be more than happy to tell you all about how it works and how it went.

A massive shoutout to our clients at BWM - all your kind words via text message, email, voice mail, and invitations to visit whilst Sydney, thank you. I genuinely feel we have the best clients - our BWM family, I was feeling the love.

Let's get onto markets, shall we? We wrapped up the US Fed meeting for September with another hold whilst I was away. The last Fed hike was in July. And as I have said before here and here, historically, when central banks pause, they rarely raise rates again.

In this week's chart, we take a look at how long it takes from the last interest rate hike to the first interest rate cut. If July was in fact the last hike during this cycle, then expect the US Fed to start cutting rates in March of 2024. Why? History tells us that it takes, on average, 8 months from the last hike to the first cut. The longest was during 1969-70 and 1997-98, which took about 18 months, and the shortest in 1990, about 3 months - and everything in between.

One key difference in today's environment is that inflation continues to remain higher than the FOMC's 2% target, which means we may see the US Fed keep rates higher for longer. Having said this, we have been seeing inflation drop quite rapidly, in fact falling as quickly as it rose, until recently where we saw a small tick up (see below chart).

What is for certain is that we will fall into recession. It's part of the business cycle. When it happens, no one knows. Not even the Fed. Here is the Fed's track record going back to the last 110 data points to 2012:

  • Fed funds rate: accurate 37% of the time

  • Core inflation: accurate 29% of the time

  • Unemployment rate: accurate 24% of the time

  • Real GDP growth: accurate 17% of the time

Interestingly, the St. Louis Fed recently released a paper titled, Can Economists Predict Recessions? You can read the paper yourself, it's not long at all. But in short, the answer is no, not really. The sooner we acknowledge the Fed, economists, or financial experts are no better than anyone else in predicting the future, we can get on with using higher-quality investment decision frameworks rather than low-quality, poor investment decisions.


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