428: News of the Week 05/15/24

My key takeaway from our guest (Ryan Bourne from the Cato Institute) on this week's episode is that policy mistakes that adversely impact the free markets happen for a variety of reasons: Misread of data Poor use of policy tools Political motivation National Security interests Whatever the reason, the consequences of policy mistakes are real for investors. For example, the FED let inflation run too hot when it thought it was transitory, which probably then created a situation where they had to hike more aggressively than they would have if they caught inflation at the front end. Resulting in a detrimental hit to interest rate-sensitive investments such as real estate and debt securities. Today, we can see examples of potential fiscal and monetary mistakes unfolding in front of us: On the monetary policy front: the FED is waiting for data it needs to start cutting rates...but, it's running into the presidential elections timeframe (RNC convention in July, DNC in August). So, it may decide to not touch the FED rate until end of year...Thus the FED may be forced to make a policy error due to political considerations. On the fiscal policy front: we see large investments to support US manufacturing; large investments to onshore critical technologies such as semiconductors; trade protectionism including tariffs on imports (new tariffs announced today on Chinese EVs, storage batteries, steel and aluminium products); immigration policy is also at risk of politically motivated policy decisions. As investors, what can we do? It's not possible to predict and factor in the impact of all of these policies. What we can do is isolate key macro themes that are likely to drive secular trends over the coming decades. For example: The Aging population in the US and other developed countries. This will drive growth in health and wellness products and services. Investment in upgrading the US grid to support huge demand of electricity (data centers, AI driving computing, EVs) and to accommodate new energy sources. Deployment of AI in key industries such as biotech to accelerate drug discovery. Historically high level of cash ($6 trillion) is sitting on the sidelines as investors decide to clip 5% interest in money market funds. As soon as any signal comes from the FED that it is ready to cut rates, or even if it is going to significantly taper its Quantitative Tightening policy, there will be an enormous amount of capital rushing back into investments: equities, bonds, real estate etc. Investors should already start deploying their capital into investments. Do not sit on cash and/or money market funds. At 5% money markets may be tempting, but that rate will not last when the FED starts cutting and then you'll be chasing assets that have already appreciated dramatically.