INSIGHTS
AUG
22
COSTA’S CORNER
“I'm late, I'm late for
A very important date.
No time to say hello, good-bye, I'm late, I'm late, I'm late”
I know, I know, I may have used that little ditty before but once again, I feel we are in some Alice in Wonderland moment and there is no getting out of the rabbit hole.
Everything you read nowadays seems to have been written before and that’s where this rabbit hole inference comes from.
We are waiting on the Fed policy makers to come out in Jackson Hole and say something. Anything. Explaining their thought processes about lowering rates. They see the economy slowing. They see negative rates in Europe as an unsustainable model. The trade war with China will be taking its toll on the US economy and we need to give that economy some help.
Been there, done that and it all turns out the same. The Fed will do whatever it will do and the economy is going to slip into some sort of recession at some point. Lower interest rates won’t do much to help only because lower borrowing cost only help those who want to borrow and if companies feel that the next 12 months or 18 months will be a period of negative growth, why would they take advantage of a slightly lower cost to borrow.
The only reason I can see corporations taking advantage of lower rates is by retiring debt with a higher cost structure. However, we have been in this ultra low rate environment for over 9 years, how much debt do you think is out there at 7% or higher? Very little and what is out there at those rates is considered junk and those bonds won’t be retired ( or can’t be retired) at lower rates so, in essence, who is really going to benefit from lower rates at this point/
Consumers? Mortgage rates may drop a touch but I don’t think you will see much of an increase in mortgage debt. Most mortgages carry somewhere in the 3.5-5% rate. Most high rate mortgages have already been refinanced at lower

rates. Another key thing is that if you are worried about a recession and possibly a change in your employment status over the next year or two, will a 25 or 35 basis point drop in mortgage rates entice you to buy a home? Doubt it.
So while the President and Wall Street want rate cuts I don’t believe for a second that they will reduce the risk of a recession all that much.
The economy is the economy, it has cycles, some longer than others, some shorter than others. The natural ebb and flow of economic cycles can be tweaked but they can’t be stopped. We are very near the end of this particularly robust economic cycle, prepare for the changes and don’t be surprised, you've been warned.
Even though its on the horizon, the upcoming recession has not given me the signals to reallocate just yet.
50% Stocks
25% Fixed Income 25% Cash
Remember, you can email me at PC@Peterpcosta and give me your thoughts, complaints, whatever and I promise to respond.