A Time for a Thinking Pause…

The actions at the FED this week and Chairman Powell’s comments after provide a lot of input to digest.

First with all the hype given to AI here is the answer I got from Co-Pilot when I asked it what I should be thinking about this morning.

“Following the recent Federal Reserve meeting, which indicated a cautious approach to interest rates, investors may consider a balanced stock market portfolio that includes a mix of defensive and growth stocks.

• Defensive stocks can provide stability during economic uncertainty, as the Fed is expected to cut interest rates, which can lower borrowing costs and stimulate demand. 1
• Growth stocks may also be attractive, especially if the Fed’s stance on inflation and economic growth leads to a more favorable investment environment. 1
• It’s crucial to monitor the Fed’s decisions closely, as they can significantly impact stock market performance. Overall, a diversified portfolio that balances both defensive and growth sectors could be the most appropriate strategy in light of the current market conditions.”

The answer kind of coincides with the market action this morning. Maybe first, Let’s take a look at a step by step rundown of my notes from Powell’s press conference.

1. The comment that has gotten the most action was: A December rate cut is not a foregone conclusion.
2. The second most interesting comment was: not his exact words, but my interpretation, the dramatic cut in labor force by deportation and co-incident drop in labor force participation as people hide is the number one thing happening.
3. Result is that net job creation is at a “zero”.
4. What the FED is trying to do with lower rates is to increase labor demand.
5. And the most surprising comment, later, was Powell’s contention that the FED sees the current situation as the bottom of the employment rate.
6. Powell does see the consumer under extreme pressure based on imbedded inflation from the initial reaction of supply providers reaction to Tariff’s. He anticipates the rate of increase to decline as higher prices become the norm.
7. Powell sees the consumer in general in good shape in terms of debt load.
8. Powell sees consumer spending as a bigger number than AI buildout numbers.
9. This led Powell to the conclusion that the consumer part of the economy is stronger now in 2025 than it was at the time of the 2000 Tech Bubble. While he didn’t say it, I imagine that some of that thinking is based on the huge government action in the 2020-2021 Pandemic inputs that are still rolling around in the economy.
10. He said overall GDP for the year 2025 will be on the mild side at 1.6 %, I imagine the weak first quarter will be somewhat offset by fourth quarter spending on the AI buildout.
11. While he didn’t say the reason, he mentioned that the amount of capital in the economy has increased dramatically since 2000 and for sure since 2020. I am guessing he was thinking about all the Funny Money that started with Bernanke and the fact that the FED Balance Sheet was going to be frozen at a high level in December.
12. And finally, he reiterated that the FED is seeking a balance between Inflation and Job creation.

Later on CNBC, Jeffrey Gundlach’s comments are probably just as important as Powells.

1. First, he see’s the FED actions as steepening the Yield Curve.
2. The surprising thing to him this year is the Bond rally that makes 2025 the 11th best Bond performance year.
3. All this is because the FED is concentrating on short rates, as that is the only thing they directly control.
4. FED may be trying to cut mortgage rates through it freezing of Balance Sheet.
5. The New FED chair in mid 2026 may be the biggest thing out there.
6. Credit spreads between the various sectors, Treasury, Corporates, and junk are very tight, indicating there is not much fear in the market place.
7. One has to keep in mind that easing short-term rates has the effect of increasing deficits.
8. He thinks that last week was the time to rebalance, drastically reduce gold positions.
9. At the moment his preferred balancing is 10% gold, 45% stocks, 5% commodities, 25% bonds, and 15% cash, and to fudge, maybe dip into RE for a 5% position there.
10. And finally in summary, when trouble does come to the economy, it will probably come in clusters as everything is interconnected.

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To Wrap-up, I would say that Powell’s comment that the employment situation is at a bottom is the most glaring area where he could be really wrong. More on that in coming days.

At the moment, our Climate Tech Model is not making any changes, Current allocations are 37 % to Climate Stocks and ETF’s, 41 % to Tech and AI , and 23 % to core Speculative area, SPXL, TQQQ, and TNA. The Market and Monetary Multipliers are still working with October 17-21 bottom areas.