Iron Capital Insights

  • Iron Capital Insights
  • June 20, 2019
  • Chuck Osborne

Goldilocks

The Federal Reserve’s Federal Open Market Committee (FOMC) met Tuesday and Wednesday of this week and they did nothing…or did they? The market thinks what they did was just right.

Let me first say something that should be obvious, but probably isn’t: the Fed has a tough job. We used to understand that. We used to give experts the benefit of the doubt, because we understood that doing things is hard and requires a certain set of knowledge and skills. We understood that because we were a nation of doers, so we naturally understood the difficulty of doing.

Today we are increasingly a nation of spectators. Spectating is easy, and whatever it is we are spectating looks a lot easier than it actually is. It is not just that we sit there and spectate; we also criticize. The average college football fan, whose own athletic achievement involves a handful of youth participation awards, would, in their mind, be a much better quarterback, coach, and of course athletic director than anyone actually associated with their school’s athletic department. They would have never dropped that pass or thrown that interception or hired that idiot of a coach.

Spectators areso awesome primarily because they have the benefit of hindsight. Most of their criticism occurs after the fact. Unfortunately, doers do not have this luxury. It matters little what they are doing; anyone who does anything does so in real time and must make decisions without already knowing the outcome. No Fed spectator has ever made an interest rate mistake, and if they did, they wouldn’t admit it and wouldn’t have to because it was just conjecture anyway.

Jerome Powell and the other members of the FOMC have to actually do something. Increasingly they have become masters at doing something by simply suggesting to the spectators what they might do at some point in the future. Toward the end of last year the Fed, which had been raising rates, added the word “patience” to their statement. The spectators cheered this “pivot,” some even claiming that it was a complete reversal of policy.

Keep in mind that the Fed made no actual change to actual policy. Markets didn’t care; the “pivot” is now accepted, and don’t tell anyone otherwise. That was six months ago – a blink of the eye in the real world where doers do things, but an eternity for a spectator. The Fed needed to stop being patient and start cutting rates. Come on, we are just watching and watching is boring when the doers are just being patient!

So the FOMC met with all the spectators, including the President of the United States, pressuring them to do something. What did they do? Nothing. Then when explaining the nothing, they removed the word “patient.” Hallelujah! It was not too hot, nor too cold; it was just right. The Fed also left overnight interest rates right where they were before.

Was that the right move? Only time will tell. Meanwhile, we do not have the luxury of being spectators; we must make investment decisions. The circus-like atmosphere that surrounds FOMC meetings is all the more reason that prudent investors make investment decisions from the bottom-up. Each investment should be judged on its own merit, and if the decision to invest rests on a 0.25 percent change in interest rates, that is not a very large margin of safety, is it?

The Fed gets too much attention; we will be talking more about that in our next Quarterly Report newsletter. I guess the spectators have to watch something, but the rest of us have better things to do. Go enjoy your summer!

Warm regards,

Chuck Osborne, CFA
Managing Director