“Start Low and Go Slow”

Dear Clients and Friends,

In medicine there is a very useful piece of advice that pertains to the usage of certain drugs, and that saying is, “start low and go slow”.  Some drugs that need to be tapered; certain medications need to be slowly lowered to achieve a good outcome.  This applies also to other variable, for instance if blood pressure is too low, you want to raise it slowly, and the same principle applies to blood pressure being too high.  Systems like the human body do not respond well to sudden perturbations, so medicine has compensated by making certain changes very gradual and this has made drugs and treatment much safer over time.  What if I were to tell you that our financial system is very similar to the human body?

In 2008, when Fed Chairman Bernanke and Treasury secretary Hank Paulson began to flood the financial system with money to put out the fire the credit crises created, they made a very sudden and impactful decision.  The patient was on life support and needed a massive transfusion of cash, and this action seemed to work.  After 9 years the patient was well enough to leave the ICU, and Fed Chair Janet Yellen decided, in her last decision as Fed Chair, to raise interest rates.  Her successor then decided that the Fed needed to continue raising rates and that seemed to work well until last December, when the patient had a setback.  The Fed had to put interest rate increases on hold, and that is where our story begins.

When the Fed decided to increase interest rates, they also decided to start reeling in some of the money they had cast out during the financial crises.  In medical terms this means that the US economy had gone from physical therapy to strength training, where now the economy had to work to overcome the resistance created by the Fed’s policy.  The old saying for strength training is, “no pain no gain”, and that is essentially what the patient has experienced the last 18 months.  The slow tapering process of stimulus is one of the major reasons for the markets tumultuous last 6 months.  I have described this process as, “the fed threading the needle”, and I still believe that this is the case.

What should inform investors in times like these is the way in which the economy is responding to the Fed’s decision.  So far, we can see very little in terms of widespread deleterious effects upon the economy.  There are parts of the economy that are suffering, but this may not be due to the Fed’s policy, and there are areas where they look overheated but this again is most likely not due to the Fed.  The Fed has to prove that it can handle an economy where the risks on a global scale are high, but the risks on a domestic scale seem reasonable.  The Fed will have to make some very difficult decisions in the coming months and if they make just one wrong move the market will punish investors for a short period.  What will ultimately matter is how the Feds decisions ultimately impact the economy over time.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All investing involves risks including loss of principal. No strategy assures success or protects against losses.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

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