Why you won’t see 8 interest rate cuts from the Fed: Opening Bid

The stock market is pumped up on a view that the Federal Reserve will make it rain free money once more. Many pros think a cooling US economy and waning inflation set the stage for a barrage of interest rate cuts starting in the fall. And with those lower interest rates, a land of even higher stock prices for top names such as Apple (AAPL) and Nvidia (NVDA) are unlocked. But is that just wishful thinking? Should investors think through this one more rationally?

Meanwhile, former President Donald Trump is leading in the polls versus sitting President Joe Biden, reigniting what is known as the “Trump Trade” on Wall Street. It also has people calling out danger ahead for the economy. On the latest episode of Opening Bid, Yahoo Finance Executive Editor Editor Brian Sozzi chats with Fed Watch Advisors Founder and Chief Investment Officer Ben Emons. The pair dive into the potential for massive interest rate cuts, if stocks are majorly overvalued, and if Trump would make the market even greater again.

Video Transcript

Welcome to your favorite finance podcast opening bid.

I'm Yahoo.

Finance executive editor, Brian Sazi.

Now, let's make some money and get a lot smarter here with me.

Now is Fed Watch advisors founder and chief investment Officer, Ben Emmons.

Ben.

Good to see you and congrats on the new firm launch.

I know it's been a long time coming.

And I also just realized I told people that this was their favorite podcast and, and I'm hoping it is, maybe you could help us uh drive that message home.

Absolutely, Brian.

Good morning.

Great to be on.

So I uh I'm gonna lean into your, to your firm's uh new name Fed Watch Advisors, which I, I really did because I'm a fed watcher and I know there's some tools out there on the internet uh that lean into uh fed watch.

But my first, my first question to you is really tied to a note um by the folks over at city that is making.

I think some waves here uh on a lot of trading desks, they are contending.

Ben hang with me here.

Eight rate cuts through July 2025.

Uh to me that would be AAA rate cut.

Bonanza.

Do you see that happening?

That's truly Bonanza.

And that seems unlikely.

You know, we know how Powell and, and the rest of the F MC is really thinking about this, that their level of rates, they have to sustain a little while longer because they need that confidence that inflation is really moving down and what you looked at from the minutes and also that monetary policy report on Friday, they make a lot of emphasis on that.

It it's not enough progress yet, too slow of progress.

And and that means that that rate is restrictive, but it's never been sufficiently restrictive or overly restrictive.

If if that was the case, then city is right, there would be a bonanza of rate cuts following because a real restrictive rate would bring the economy down on its knees quick.

And that that's never happened.

What we're going through now is just a soft patch.

I think just a temporarily slow down if you read that monetary policy report, right?

They talk a lot about slow down in exports, slow down in some of the manufacturing construction, slow down in, in um somewhat in spending but but it's all very moderate, but this word emphasis on moderate.

So as long as the fed is in that thinking, moderate slowdown with inflation gradually uh moving to the target, there is not going to be a bonanza of breakouts.

That's the reason I don't disagree with city that ultimately, that could happen if the economy flips on its back and hopefully it doesn't happen.

But if it does, then that that is all that is definitely the outcome.

But eight rate cuts is also not priced by the markets is more like three full rate cuts over the course of the year.

That seems more realistic.

I think at this point, I think that's a really good point is made if the economy flips on its back and, and that's what I want, that's what I wanted to uh follow up with you here on because what would give, what gives you the confidence the fed is going to get this right.

They are waiting for, it seems like this number to be hit on inflation.

What 2% is their preferred inflation gauge and they want to hit this number.

Where is it to say that they will not be really behind the curve on cutting rates?

And by the time they do decide to cut rates, we're looking at a US economy barely growing or, or dare I say even a even in a freaking recession.

Yeah, that is of course a risk.

And they, they, they do uh have said that that's something they keep in mind, right?

If they're too, too restrictive in policy at this point, that that will be the risk in the future.

You, you're again behind the curve with cutting rates, but it's easier to cut rates and to lift them though.

Right.

That's, I think 11 big difference compared to what they had to do in 2022 they had to get off the sidelines much faster than they realized.

And then really throw in big slugs of, of, uh, of rate hikes.

The opposite is easier.

In fact, March 2020 is a good example of how they brought rates down immediately to zero.

Right.

So, if there were a true calamity, the FED has a lot of tools in the box to address the issue.

So I think the economy stays here on track part because, and it is really important.

I think Brian to, to another topic is that it's really fiscal policy that's driving it.

And we don't see any material change in fiscal spending and no matter who will be president, that candidate, the new candidate, the new president will come in with an agenda to stimulate the economy.

And if that's, if that's the case, then the fed cannot do much other than just go really slow on the rate cuts if they can.

And I think that's the scenario ahead of us before uh before we came on, uh and started chatting, Ben, I, I was reading a drinking my, I don't know, seventh cup of coffee and an energy drink.

Uh my usual modus operandi in the morning, but a really interesting op ed um by Ken Sault and Robert Rubin in the New York Times, uh discussing a potential second Trump presidency and how it might be dangerous to the economy.

I have a couple questions in that.

I wanna ask you, but do you think a second Trump presidency for the US would be dangerous to the economy?

Why or why not?

Yeah, it's an interesting way of thinking of it because, you know, first of all markets never vote on a particular candidate, right?

They just look at the agenda and, and make a calculated probability, saying which agenda will, will actually succeed.

And there's more things to it, let's say that President Trump would be re-elected.

He does confront a congress that could be split.

There could not be a, a Republican Congress could be a divided one which makes it for him harder to implement everything specifically tax cuts.

And secondly, the tariffs that he has in mind, although that that would be untried, I think a universal tariff, it all depends on how other countries react to that tariff.

And it also depends on how domestic producers adjust to these tariffs.

A lot of mixed evidence on this and how the previous trade policy affected the economy.

There were job losses in certain sectors that were test passed on by 100% to in certain product categories, but it was not completely across the board.

So that's to be seen.

And and lastly, what's interesting every time that that President Trump is sort of being, being touted as the new, the new, new president, there's some sort of animal spirits lifted in the markets.

Interestingly that happened after the debate, for example, too, there's something about, you know, this great make America great.

Again, the slogan and again, I'm, I'm not here saying that President Trump will be the next president or make any, any suggestion thereof.

But it's more like observing as, as an analyst saying this is a, an animal spears response in markets that see, you know, sort of this investment, lower taxes, friendly climate of deregulation, that sort of thing really, you know, spurring the economy.

And I think that is actually the positive side of, of the, of the agenda.

And by the way, you could say the same about President Biden and by the way, but he may continue with all the fiscal spending that he has in mind.

And people have said like at some 0.2 that will become problematic because of the deficit also could become problematic because of again inflationary pressures re emerging.

So I think for both candidates, that's the key issue, how will inflation actually reemerge as they come into the White House for that for that term?

And I think that's the biggest risk I think for, for the economy and the markets and that's not for now, market expectations are that the fed will reach its target and emission complete.

So if any of these policies that they enact Trump with his tax cuts and terms and bind him with his fiscal policy that does lift up inflation.

I think that's the biggest risk of for both, both candidates.

All right.

Well, I will, uh I will be more fair and balanced here ben, because I really don't feel I'm getting raked over the calls on youtube.

I suspect I will anyway.

But nonetheless, are both of these candidates dangerous for the US economy.

Let me just tick through this.

You have President Trump potential universal tariffs, more tax cuts raises the deficit.

Maybe President Biden in a second uh in a second term, pushes through various green new agendas that acts like a tax on corporations and US households is just the bottom line is that come 2025 the US economy is going to be in a totally dangerous position with whoever is in the White House.

Yeah, the deficit is the, is the magic word there, right?

The the un magic magic word because people look at the UK what happened there, right?

Of how it was ill times, the the the policies and then the market reacted to it.

Although I think in the United States, it, it's a little different story though.

We, we know the deficit is large and we had last year in the summer.

A bit of a test of that, that idea where it really came down to like how is the treasury going to fund this big deficit?

And it may have to extend the materiality of his debt in order to do so and that drives up interest rates and then therefore could slow down housing and slow down investment.

I think this is the challenge here that you have a large deficit.

How much more can you truly add to it?

That the treasury has no choice but to fund over the long term bonds that then have to go up and yield to get demand for those bonds.

And I think this is really the part of the US situation at the risk and the danger you talk about as opposed to a particular candidate by, by himself affecting the economy really negatively.

As you mentioned.

I think the end, animal spirits around former President Trump are really interesting how markets respond to it.

But also with, with President Biden market has been very responsive to the investments in the economy and what it does to semiconductors which have been such a drive of markets over the last year.

So I think it's more about the deficit.

How will the treasury fund it and that refunding idea that's been an ongoing sort of lurking risk against.

As the last point we do have a debt ceiling that comes up in January of 2025 which is like, I think a week after the, the president sits in the White House, the White House that that process starts and let's not forget that in June of 2023 when we were negotiating that debt, that debt ceiling, that the yield on treasury bills like the safest asset went up from something like 3% to 7%.

So there was something in the markets about this debt ceiling is, is a, is a negotiation about it.

What are you going to do about this deficit?

You're not doing anything about it.

Rates may go up because yes, you're gonna have to fund it with more debt and, and, and lower maturities.

So that's, I think the key is I'm gonna stick with my word of the day uh for just one more moment, Ben, and that is, that is dangerous.

And, and the last, you know, thing that really stood out to me in this New York Times op ed is the potential for the removal of the fed chief should President Trump win?

Now, of course, President Trump has been very vocal, doesn't seem to be feeling uh Jerome Powell and everything that he has done.

But within that story, uh I is uh mentioned by Peter Navarro very um uh let's just say a hot button person in the world of finance to say the very least.

He, he suggests that uh Trump may remove Jerome Powell within the first, his 1st 100 days frame.

This for us.

How dangerous would it be to remove AJ Powell uh early on in a second Trump presidency, how dangerous for the economy and how dangerous for markets?

I think what markets are looking at is that John Powell's term is going to end in the next at least two years.

So it is in the cyclical horizon and the way the structure of the F MC works, it is still a body of, of um say democracy, so to speak, you know, it's not just the uh the chair that, that drives the entire decision making and, and you have, of course, the vice chair Jefferson in this case, who could step in temporarily as acting chair.

Um And it's really more about transition to a new chair.

So if you think back of the previous transitions that we had say when we went from Greenspan to Bernanke and from Bernanke to yelling and yelling to Powell, I mean, what Marcus typically try to frame is about how Dovish or Hawkish rule this candidate be is this new chair, you know, people know Volcker was the most hawkish um chair.

But in that sense, being looked as very pragmatic at times and somewhat hawkish, but also flips to Dovish the names, the considerations for markets.

But if say that Powell were to be critical removed.

It's not so easy by the way to do that, you know, there's, there's congressional hearing and senate hearings about it before it actually could happen.

And that's to be seen as it actually happens.

But let's just hypothetically say that that Powell just steps down.

I don't think markets will react negatively because they look at the body of the FO MC, but they will extrapolate out on who will be that next candidate.

Will it be really do candidate?

If that's true, people will start pricing and easing, right?

And they start like looking to cities report and say, hey, that is going to be eight rate cuts.

All right.

Uh Ben hang in there.

Uh uh It's time for a quick break.

Uh Don't go anywhere.

We'll be right back with Ben coming up.

All right, Ben.

Uh welcome back here uh to opening bid.

Of course, we were scaring the hell out of people with dangers of the economy in the market.

So, I mean, there's a, there's a lot, there's a lot going on and look, we're obviously not trying to scare anybody.

Uh just trying to lay out what could be coming at investors uh months and years ahead.

But you and I were talking about something real quick before we came on and that is just the state of the markets, despite all the dangers we have outlined here, uh the election, uh various uh geopolitical risks.

You still have a market that has touched the S and P 500 that is 34 records this year.

What is going on?

That's amazing.

Right, Brian.

That, that we are in that stage because as we were talking about, we get all these elections UK France and our upcoming election in the US.

Lots of uncertainty, trepidation and lots of like movement and how all the governments look like.

And, but as you can tell, like markets have taken it like these are risk on the election, so to speak that meaning, you know, there is actually not really going to be a major change in policy as a result.

Uh It's not going to be flipping from one side to the other.

Um you know, UK is really good example, right?

How labor just regained massive like majority in the case of France too, we flip from far, right to far left and net net coming out basically with no risk.

And the French sovereign C DS, that's basically a good risk measure for, for French, uh you know, risk of defaulting is dramatically narrowing and spread now.

So and same for the US after the debate, people concluded like, well, there's a good shot at that former President Trump could win the White House.

So we know what's going to happen and all the uncertainty disappears and the volatility goes down and the stock market goes off.

I think that's what it really is about.

People want certainty and they look at these elections like these are becoming more certain outcomes and that's why we're getting this low volatility, you know, risk on the field in the markets.

Like we're seeing this morning, you called me out also before we came in for checking out your linkedin profile ahead of this.

Look, I'm preparing for the segment Ben this is what I do.

I mean, I gotta prepare, I gotta look online for things and you know, on that search, I ended up going through uh a few different tabs and mentioned somewhere iii I forgot where I got this.

At 16 years old, you witnessed the 87 market crash?

And are there, are there conditions in place in today's market that remind you of that 87 crash?

And do you think we could be on the precipice of something like that happening?

I'm calling out record high valuations.

Uh I see Tesla up 89 days in a row for really no apparent news NVIDIA over a $3 trillion market cap.

To me, it feels like an expensive market that doesn't deserve to trade where it's trading at.

Yeah, and that valuation does matter as I as I've mentioned.

But I also think it's about ultimately it's a macroeconomic trigger that that makes people aware of that the market is or was too expensive.

And then the realization sets in you have to get out of these expensive names.

Lots of uh comparisons have been made between NVIDIA, let's say.

And Cisco in, in the nineties is an example which are two very different companies.

And it just generally the idea of like where A I is versus the the internet time, the start up internet uh period in the late nineties, there's definitely some level of frost is there.

There's a lot of liquidity in the market, you see speculation through this sector called meme stocks, right?

That that's happening.

Uh We know we know that volatility may be on the lower end of the historical range if you read it again, boring report perhaps.

But the the market policy reports from the FED, there's some interesting nuggets in there.

It's all section about financial stability.

One thing that stood out to me is they're making again a reference to what the hedge funds are doing.

They have more leverage on than they had several years ago.

They have this huge what they call basis trade on, which is like playing basically the treasury futures versus treasury bonds.

That seems to be a massive trade.

I think if I think of that, for example, as a, as a, as a former trader and PM, when I was really involved in that type of trades, those are like very murky areas, you know, that are unknown how exactly he's going to unwind.

I think also the Japanese Yen is another example in that context, Yen is at the weakest level in, in almost 40 years.

And the yen is always used as a borrowing mechanism for taking risky bets and other assets called the Yen carry trade.

The technical term, how that's going to unwound against this valuation issue that we're seeing in, in, in the stock market, which could get even richer, by the way, it could be even more expensive before it actually unwinds.

So I do agree that the 1987 analogy, maybe to an extent there, we obviously have high frequency trading and algorithms and other issues today that could trigger that really quickly.

That's happened before flash crashes and that sort of thing.

But at the end of the day, it's a macroeconomic reason why it's all unbound.

And to our earlier discussion, what's the risk to the economy from here?

Right.

The deficit, the tariffs, the different combination of these policies, ultimate trigger, an affecting the economy.

That's negative.

That's what we're actually waiting for.

And we're not seeing that yet until it does.

And people watch claim, jobless claims and the unemployment rate is one reason to be careful like it goes up too quick, too fast.

The economy is flipping on his back, right?

And then the trigger is there and all the online start to happen.

So I think as an as an investor, you would look at these, these, these risks as they're there on the list, we know what they're to an extent about.

On the other hand, you just got to invest today.

Ok. And what's the opportunity?

Well, the market is in a good spirit.

So you should invest.

Not, not to be silent, Ben, you, you scared me a little bit because you did not say Brian, you're a dope.

Uh we are not going to get a crash like I mean, I I'm listening to what you're saying and it, to me it sounds like there are conditions in place, notably the the hedge fund leverage um aspect too in the high frequency trading.

Uh But what, how does, how do you go upon spotting a potential crack?

How does the average person even do that?

I look at the average investor, they have their 401k s, they're sitting on maybe a lot of wealth and NVIDIA apple various tech stocks, they don't have the access tool to tools that certainly you have in your experience, but also the tools and access that I have.

Yeah, I think the the the really easy, simple way for people that that that do not have access to these tools to just look at the statement and look at the position in the video and say that they have that and look at how much percentage that position is today versus say when they bought the stock three or six months ago and if there's a significant difference in that percentage, so say that their position in the video today represents 15 or 20% of the portfolio and a few months ago, it was just 5%.

That is a sign of like you see this is becoming quite frothy cash in cash, cash in on the NVIDIA.

Go out and buy yourself a Lamborghini.

No, I mean no, but look, but really, I mean, you have to, you, you shouldn't have to your point.

You shouldn't have most of your portfolio in NVIDIA.

Right.

That's right.

You should never have it in any single instrument no matter what company it is or, or even a treasury bond for that matter because that's called, that is called concentration risk.

And people may not realize that they have that in their portfolio.

So you should carefully look at it like if something is like, I would say 20% 30 40% position in one single asset, whichever one it is, you should take action because that's too much concentration risk.

Now, what's the ideal percentage?

Lots of research on it.

People have typically said anything between 2 to 5 7% type of position that's reasonable if you have other positions, but I would never have a position that's so large that it dominates the entire portfolio performance.

And that's I think what people should look at in a statement if they're listening to that supposed to.

Yeah, I got all the tools I can analyze all kinds of things, but I would look at the same thing and I do that in my own portfolio.

Like concentration risk in one name is a serious risk to your retirement, of course, but you have all your wealth tied up in NVIDIA, correct?

I am the right.

But, but you're right like, you know, it is phenomenal, phenomenal opportunity to to be in and and uh and you know, it is actually made major, it's a it's a phenomenal era, right.

Now that A I is an old technology, right, from the seventies has now become so mainstream and, and, and, and so much money is put into it, right?

That's why these structures are up.

It's just the money being spent on it, that's driving it at some point that spending ends, right?

For whatever reason.

So just, yeah, think about it, you can build your, your retirement on one particular asset even though it, it goes really well for a long time.

You know, the the other examples you mentioned like an auto maker that size was was another example like that.

There's many others like that at some point, things change and just be mindful, right?

If you have too much of one too much exposure of one particular um asset stock bonds, whatever it is just be very careful, be in the in about two minutes that we have left.

I just want to uh channel the the vibe of your 2020 book uh the end of the risk free rate investing when structural forces change.

Um government debt, do you think because of the rising amount of of government debt on the books?

And what is likely to come in the years ahead are entitlement programs like a Social Security?

Like a Medicare?

Are these things at risk of going away or at risk of major cutbacks?

Yeah, they are because you're getting this this situation of that.

If you're running a prolonged deficit that becomes so unsustainable that you have no choice but to cut those programs.

Right.

And that's the challenge besides that they, you know, there's estimations that Social Security could run out in terms of, of being able to, to fulfill his obligations to, to, uh, to retirees because there's just not enough money left.

And even though right now it's making some making up somewhat on, on, on the higher interest that it earns on treasury bonds.

So it isn't, isn't a clear risk, but it's also a very difficult political choice that has to be made.

We've got to cut in time and time and spending in order to control our debt and deficits.

And that's, that's just like a household idea too.

And you gotta, you run your credit card to a certain level.

If you run it to the max and you don't do anything about it, you're gonna have to make drastic changes in your budget.

And I think this is something that may be ahead of us so far.

We're banking on the economy keeps growing, right.

And we keep getting like investment and we finding other ways to, to sort of manage that deficit uh or effect eventually be able to cut rate.

So the interest burden gets a little less.

But, you know, from that book perspective, when I wrote it in 2013, the first version was around the tape tantrum of the, of the, of the Federal Reserve.

There was a recognition that, that interest rates were too low and it was too much risk.

And I think that risk is still today, even with higher rates, you know, there's a lot of interest rate risk in the system.

So that, that is, I think the other, other issue here with these large deficits, that interest rate risk will once again be repriced and you're seeing higher yields emerging in the rise.

Ben, I've already come to peace that, uh I will not be getting social security and if I do it might be a check for, for $10.

Uh, we're gonna have to leave, uh, this conversation here, uh, for right for, for right now.

Uh, Fed Watch Advisors, founder and chief investment officer, Ben Emmons.

Ben.

Good to see you.

Congrats on the new firm, uh, firm launch and, uh, let's hope we don't get those eight rate cuts by July 2025 like city predicts because we'll probably be in a recession.

Ben.

Good to see you.

Uh, we'll talk to you soon.

Thank you, Brian.

Good to be on.

All right.

And that's it for the latest episode of opening bid.