By Scott Garliss, founder of BentPine Capital The federal funds rate is headed even lower. This week saw a huge shift for the investing landscape. Donald Trump was elected president of the United States for a second time. Wall Street responded to the news with a broad-based rally in risk assets. The major indexes, like the S&P 500 and Nasdaq Composite, and crypto currencies rocketed higher as a result. One of the reasons for the gains was a lack of investment exposure for momentum-based hedge funds. Due to close race and the uncertainty surrounding the election outcome, short-term oriented institutional investors reduced their risk exposure. That way, they wouldn’t hurt performance so late in the year. But there are some more significant factors that drove yesterday’s rally. When Trump last occupied the Oval Office, he championed less government intervention and red tape. That means his administration will be more inclined to let the free-market decide how business gets done, rather than overbearing government regulators. Now, that doesn’t mean anything goes, but it does mean less oversight and investigations for the technology industry. In addition, Trump is a proponent of a weaker dollar. He made this opinion well known in his first four years. He feels that will help drive demand for U.S.-made goods and juice the domestic economy. And he knows an easy way to get there: cheaper borrowing costs. Because, lower rates mean dollars will become more plentiful, driving down the value. As a result, this next time around, like the last, he’s likely to follow a similar tack. He’ll ramp up pressure on the Fed to drop the federal funds rate and boost economic output. The change should boost demand for and the price of dollar-based risk assets like crypto currencies. How can I be so certain? Let me explain. In 1996, I got my first “real job” out of college. I got hired by a small brokerage firm in Richmond, VA, called Wheat First Butcher Singer. I took whatever opening I could find, to get my foot in the door. I saw this as my opportunity to start a long and successful career. From the first day, I was determined to learn everything I could. I would pay attention to the habits of others that I saw as paths to success as well as those that ended in failure. I wanted to understand both, so I knew which practices to emulate and the pitfalls to avoid. And over the years since, I’ve incorporated those observations into all facets of my career. You see, since 1996, I’ve experienced some of the best and worst stock market and economic environments possible. From the dot-com bubble to the financial crisis, to the COVID rebound. I’ve experienced a lot. But each time, I made notes to myself of what caused them and what helped pull us out. Because I knew similar events and environments would happen again, and I wanted to use my knowledge and experience to help people navigate them safely. As a result, I’ve found one habit that continues to provide success time and again. By following the “bread-crumb trail” of data, I can get a sense of what’s happening economically. By knowing that, I can tell if our central bank is destined to adjust policy higher or lower. That’s important because when rates are falling, it usually means individuals and businesses have easier access to funds. That leads to more spending and economic growth. The bread crumb trail I’m talking about refers to the fairy tale “Hansel and Gretel” by the Brothers Grimm. In the story, the two children’s step-mother has their father walk them deep into the woods to abandon them. The two leave a trail of small breadcrumbs, so they can find their way back out, once the adults are gone. In finance, it’s not much different. To find out what’s going on economically, we must look at a number of different indicators. By studying these smaller pieces, and then considering them together, we can navigate our way down the complete economic path. Based on recent indicators, domestic output continues to stabilize. That’s the outcome the Fed has been seeking since it started raising rates in 2022. The change should lead to another rate cut when policymakers meet Thursday, and even more moving forward. So, let’s look at a few to show you what I’m talking about. Read the rest. | 