Dear Clients and Friends:
Logical fallacies are ever present, and it is helpful to be able to identify them, as they can be harmful and cause us to make poor decisions. One that has been especially common recently is the appeal to authority, which is often paired with its cousin, reductivism or the complex cause fallacy.
Climate science has come in for a well-deserved admonishment, not because climate change is not real or an issue that needs to be addressed. Rather, it is the idea that a complex system like global climate can be explained and predicted by what is essentially a single variable model. We have been lectured by both scientists and the chattering classes about the end of the world being imminent for the last 30 years, yet the North Pole remains ice covered and the ice sheet grows in Antarctica. Again, not to insinuate that climate change is not real, but precision forecasting is fraught with peril. When paired with the exorbitant costs and failure of alternative energy to provide stable electricity, the “science” has shifted in its outlook and, more importantly, its solutions. This is a welcome development, and perhaps now we can address the issue in a way that will provide a more efficacious outcome – where reasonable, realistic goals can be achieved without having the general population live in caves.
I would love to discuss this topic in greater detail, but this missive is supposed to have something to do with investing in general, and bonds specifically. Recently Scott Bessent, the Treasury Secretary of the United States, said the quiet part out loud. He revealed the monetary wizards at the Federal Reserve (Fed) for the charlatans they are and have been for some time. He stated that the idea that they could manage the inflation rate to a precise decimal point was absurd and that a range, whatever that may be, is more appropriate. Using the appeal to authority, the Fed (with their 400+ PhDs toiling away) would have us believe that the U.S. economy can be managed by a single variable, the federal funds rate. They can supposedly manage the inflation rate and the unemployment rate and a few other things as well. This is an exercise in extreme reductivism and, I suggest, should be dismissed out of hand.
The U.S. economy is enormously complex and well beyond manipulating the federal funds rate. It is quite possible, if not likely, that the Fed’s machinations have minimal impact on any of these variables at the margin and work only at extremes. The constant hand-wringing over a ¼ of a point move in a short-term rate is (or should be) laughable. Mr. Bessent strikes me as an individual with a fair amount of integrity, despite having worked for George Soros. I believe his opening volley should carry much more weight than the identity of the next Fed chair, whether that is the Cheshire-Cat-grinning Kevin Hassett or some other sycophant.
How is this related to what we do for our clients? We have been consistent in our belief that the environment of recent years, one of increased uncertainty, will continue and likely become decidedly worse. The Federal Reserve is in a very difficult place and their tools to deal with the consequences of decades of mismanagement are limited. Combine this with a dreadful fiscal situation domestically and abroad, and to believe that we will return to a period of very low rates and even lower volatility is simply wishful thinking and requires one to believe in what seems to be the unbelievable. We believe this environment will be challenging, but we could not be more excited to face it head on.
Sincerely,
Mark M. Egan, CFA, Managing Director
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