Farr on Impact of FOMC Decision (Audio)

what the banks charge each other for overnight loans. Here to tell us more about the Federal Reserve and your investments is Michael Farr. He is the chief executive and the founder of far Miller and Washington. He's based in Washington, d C. He can be followed on Twitter at Michael Underscore, k Underscore, far f A double R and of course Washington, d C home to Bloomberg one FM and one oh five point seven FM h D two. Michael Farb tell us what your reaction is to the fed A Reserving?

Will they raise interest rates in December by points? Jim, thanks for having me very much. It's always great to be with you and Kathleen. Um. I don't I can't believe the market's reaction today. I mean, I can't, for the life of me understand how everyone didn't see this non event, no move, nothing done, as we say in the business, kind of a move out of the FED coming. And yet the market reaction today looks like I guess they really weren't expecting it. Stocks are higher, the dollar

is lower, and bonds are rallying. I mean that that really looks like there was something of a surprise in this data anyway, or somehow we've inspired the most all of the bulls and perhaps the dollar bears to come in and make some changes. They threatened, of course, more action that they're actually going to go ahead and get closer to tightening in December. I don't believe them. I wish they would. I'd like to see him moved the sidelines. I don't believe them. I think if they're going to

remain data dependent, they are very worried. I think they're chickens at the FED, and I think they're going to stay at very least on the sidelines for the foreseeable future. And of course now we've got hawks do doves and chickens. I like that, But you know, I think that, But you know, Michael seems that a couple of things. Number One, Um, it wasn't just whether or not the Fed raised the rate in yesterday and whether or not to reason December,

is the fact that they consensus view. Now the dots are all over the map, but the dots are clustered for around two interest rate increases, only two, not three as they had before. Okay, And that seems to be underscoring this view that was described very well in a trific story on the Bloomberg today that instead of diverging, traders are saying, oh, they're still in convergence mode. The Fed's not going to make a move, and if they do,

it's not going to be very much. And the European Central Bank and gosh, the Bank in Japan and the Bank of England, they're all really easy. So it seems that's one of the reasons why you see this this move down on the dollar again. Kathleen, I think that you're you're right, though I suppose on some level I'm pretty disappointed. Markets have been moving for seven or eight years now on every utterance out of the Federal Reserve.

The Fed is going to tighten and markets go down, and the Feed's gonna ease and markets go up, and the FED is going to maintain low rates for longer and markets go up. You know, I'm kind of one of these old fundamental investors who likes to look at balance sheets and income statements and understand businesses and barriers to entry and what really creates value. And a lot

of that hasn't mattered the last few years. Most of market gains have been driven by pe multiple expansion, a little bit in terms of earnings increases, and a lot of terms of really the easy money effect um optimism on, you know, free money forever out of investors. I think it's created moral hazard. I think it's creating bubbles in certain places. But I think the message that wall streets getting is They're not going to change anything soon. So I'm going to stay in and swim, and the punch

bowl stays full and so party on. Guys. Well, Michael, you know, you sound so last century with this idea of you know, actually looking at a balance sheet or you know, some kind of defensible business model or even some kind of innovation. You know, I feel for you there, you know, but you've got to get with the modern worlds. Here, let me appreciate it. Martaine said that I do. I was God rest his soul was said, I was kind of stupid for thinking that moral hazard still existed sooner

or later. And you know, it's been a lot later than I and a lot of others thought. Others thought, um, sooner or later. Fundamental valuations matter and balance sheets matter. Again, there is a disruptor in our future, and you better have a seat when the music stops. Okay, So, having said that, would you be willing to take let's say, three percent dividend from a bank like JP Morgan or another financial institution in order to just kind of wait

and maybe see when that moment comes. Yes, absolutely I would. I think it makes a great deal of sense. If you look at the banks that are trading at book value and some of them write at tangible book value. With the two and a half to three percent dividend, I think that those banks at some one they're cheap, but uh, they will benefit as interest rates go up. It's a hard environment from to make money. It's a new world for banks post dot frank, but at a

certain valuation they I think they're very compelling. A three percent dividend makes sense, and the time to buy stuff is when everybody else hates it. I don't know anybody who's out there jumping into banks. I like them. Okay, so what what and who are you avoiding and why? Well, I think you have to avoid the stuff that has

run the most and the most recently. So if you take a look at a lot of the yield stocks, a lot of the utilities, certainly the pipeline LPs and energy LPs, a lot of them already rolled over and it's way late in that trade. Uh, utilities and some of the reach they were great trades for the first

six months of the year. I think you're going to see a return, and you've already started to see people voting and moving with their wallets to the more fundamentally sound balance sheets that have real growth, that are not over levered, and that do have some dividends. So I think valuations are beginning to matter again. If the FED actually says that they're going to stay away for longer and people begin to believe it, then I think the risk trade comes back in and watch out for the

fang stocks again. But but for now, we seem to be enamored of fundamentals. I've always been enamored of fundamentals as some days it works, some days it doesn't. But I sleep very well at night, all right, So in the context of sleeping well at night, I'm just going to offer up your list the B B and T bank as well. They pay more than three percent JP more than two point eight percent. You also a side

P n C and Goldman Sacks. Maybe just talk about in the context of what you describe as this rotation out of those high yielders. Maybe at one point Utilities Telecommon reads right, Well, I would own those companies, and I'm still probably below a market weight, meaning that my allocation to those banking stocks will be below as you look at a financial allocation within the S and P

five hundred. But I think that they fit a nice place within a portfolio that has probably some consumer staples, some healthcare, and some technology, but the technology again with some stolid balance sheets. So these are these are on the banking side um names that have basically gotten beaten up as a group as there's a they really haven't with these low rates been able to make much money and earn much on deposits at all. Uh, Just any incremental rate increase helps these guys a lot. I might

be early, but I get paid to wait. And you know, as you said, Tim, as a stogy guy, UH like me, that's not a bad idea to let somebody pay me three percent when the ten year treasury is paying what one point six? So, Michael, how are you factoring into the the election into the Market's Hillary Clinton leading pretty handily in some of the latest polls out today, Presidential debates coming, but Donald Trump is giving it all he's got.

There's still time left. How how is this outcome of the election going to effect or not affect the stock market? You know, it's such a thorny question, Kathleen, whenever you talk politics, and in Washington we talk politics, uh much more easily than other places around the country. But um, this is not a political comment. Markets have been pricing

in a Clinton victory. That's where the numbers have shown, and markets have gone ahead and said we're going to place our investments basically in line with a uh Secretary Clinton outcome as victor. When she stumbled and became ill uh week and a half ago or so, markets really fell to that. It's not so much an anti Mr Trump sort of a comment. In my opinion. It's much more of a oh my, we haven't considered what we're We're going to have to put our money for a

Trump victory. So I think that you will certainly, uh see a fair amount of frenzy and fraud in the markets coming into the election. But Wall Street wants to know how to price what it can expect um and right now they continue to price a Secretary Clinton victory. Will see if that if that pans out, But a little volatility is expected. And by the way, markets are high, markets are, you know, still at a near all time high. Markets will come down at some point. That's not a

reason for panic. It will be an opportunity to do some buying. But don't start worrying. I'm talking to so many clients who think, where should we get out of this? Now? You don't, all right, Michael Farr, thank you so very much for joining us from far Miller Washington in Washington, d C. Market closed with a stock switor Dave Wilson coming up on Kathleen Hayes along with pim Fox. This is Bloomberg. Yeah,