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Fed’s Prescription of Castor Oil


Dr. Paul White

November, 20, 2023 - read

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From Bloomberg’s “The Open” with Jonathan Ferro on 18 November 2023

From Bloomberg’s “The Open” with Jonathan Ferro on 18 November 2023

Castor oil uses include traditional medicine, skin emollient, food preservative, and punishment....

We have taken our medicine, every last drop of castor oil1.  We were told it was good to make us all better.  Did it?  As of the writing of this piece, the S&P 500 is at 17.57% for the year to date.  Unemployment is at 3.7% and inflation is at 4.0%.  It is hard to imagine how badly things would have gotten without it because it is purely a what-if exercise.

If we consider the Fed’s mandate on employment and inflation from the outset, the Fed seems on track with inflation and unemployment.  The idea was to slow down the economy without bringing it to a screeching halt.  The effects of higher inflation trickle up for lack of a better phrase since it affects lower income individuals and their ability to purchase staples and other commodities.   The Fed deals exclusively with that tradeoff for short term pain versus long term trauma2. Failure would have been to raise interest rates at such a pace and such a magnitude so as to cause a market crash and/or explode unemployment.  The optimist inside us demands that we call this a “win”.

Do we need another spoonful?

The Fed is weighing this question – is another hike necessary?  This is not settled.  Reporters confront the Fed on this and they say that they need more data.  Reporters ask what data the Fed monitors, and the response is anything but specific.  We are left with coin tosses...

Is the Fed sadistic and this is some form of punishment?

Times are good, or, at least, they are not bad.  The Fed’s mandate clearly says 2% inflation, but what is so special about 2%3.  That is surely some magical number from economic wizards who were probably trying to satisfy politicians more than they were trying to satisfy investors.  Is 2% just “marketing” in the same vein as it is marketing for, let’s say, milk?!  We have probably gone too far in this metaphor, but the astute reader will note the use of the word, “probably”.

This is a difficult game from the individual investor’s perspective.  Gambling on the Fed is best left to experts for whom that is their only focus and left to insiders.  Trinary Capital recommends diversification with stocks, bonds, and liquid alternatives.  The focus of that portfolio is on liquidity.  A possibly less liquid solution is centered on the interest rate bet (or the inflation bet), something that requires skill and an inordinate amount of luck.   Luck belongs in card games and lottery tickets but less so in portfolio discipline.

1 Castor oil - Wikipedia
2 It is easier to type this than to live through it as an actual low-income earner.
3 It Ain’t Over Until It’s Over – Yogi Berra - Trinary Capital

Past performance is not indicative of future results. Remember, there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investment strategies discussed in this article) will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Please remember to always speak with your individual advisor before making any investment decisions.

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Past performance is not indicative of future results. Remember, there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investment strategies discussed in this article) will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Remember to always speak with your individual advisor before making any investment decisions.