The Fed is already too late to cut interest rates and now a crisis is brewing, strategist says

Jim Thorne, Chief Market Strategist at Wellington-Altus, spoke with Quartz for the latest installment of our “Smart Investing” video series.

Watch the interview above and check out the transcript below. The transcript of this conversation has been lightly edited for length and clarity.

ANDY MILLS (AM): The Federal Reserve has indicated that they will will probably make an interest rate cut this yearbut with the cooling of consumer spending, do you see this thesis changing at all?

JIM THORNE (JT): Short-term money has a higher interest rate than long-term money. The yield curve is inverted. This speaks of a recession. The old playbook is when you have it, buy secular growth. What is secular growth? HE. None of this should come as a surprise. Another thing I would suggest is that in a society that is tied to credit, which is what we have, interest rates are a price. Rate hikes are inflationary. And anyone who has taken an advanced course in macroeconomics knows this. So if the Fed wants to lower inflation they have to lower rates, they are late, they know it. And anyone who believes that inflation, permanent inflation is a problem, I really think they need to look back at the theory. So the Fed has the theory to back them up. They have the data to back it up. Right? Harmonized CPI, which is when you get real estate, the Fed focuses on the most lagging indicators. If you measure inflation like the Europeans, we are at 2%. So this time they are making a big mistake. It’s no different.

AM.: They are being very careful. Is this the error?

JT: There is an overabundance of prudence and they need to stop. And you know, we can get into why I think that, but right now is that why the market is going higher? Because they are ignoring the Fed. Right? And so the question you have to ask yourself is, is there going to be a financial crisis?

AM: Will there be a financial crisis?

JT: Never say never, right? I mean, look what happened in Europe with Macron losing the EU elections and the debt spiral. There is a ton of debt out there. And so in 2010, before the European debt crisis, it really didn’t start in Europe. It started in Dubai when they couldn’t refinance their debt because everyone got upset and woke up to the fact that Dubai was being used as a back door to bypass UN sanctions on Iran. Dubai could not finance their debt. Everyone was furious. And the next thing that fell was Europe and the pigs. And so in a world with an extreme amount of debt, they are playing with fire. And there’s an old saying, raising rates to stop inflation is like putting gasoline on a fire to put it out. Here we are. So it is very dangerous. So never say never. And so you have to be, you have to be aware of that, right? With so much debt. And so that’s okay, right? There are always risks. And I think that even though we’re very good for a structural upturn at the end of the decade, anything can happen, Andy. And you just have to be open-minded about it.

AM.: It’s been paying to be optimistic in the stock market lately. But it seems to me like there’s a kind of fantasyland scenario going on where it’s like the stock market ignores the Fed, there’s global tensions everywhere. Interest rates remain high. Is there a reality being ignored in the stock market right now? And what will bring him back?

JT: I’m worried about ’26. And the reason is, at that point in time, the Fed will splash their face with cold water and say, oh my god, and we’re going to cut. Right? People think that cutting 25 basis points will solve the problems. No, it’s not. So what happens in ’25 or late ’26 when they flatten the yield curve? So short rates are inherently lower than long rates. OK? So we have a steep yield curve, but still maybe the AI ​​trade has reached the point where it needs to breathe for a while. And all of a sudden you get a rational fiscal policy. Government spending stops. Think about it, Andy, in order to have economic growth generated by government spending, government spending must increase next year, not stay the same and not decrease. So you get it, you get a fear of growth. And then the real question is, well, is the market ignoring this predicament ’cause everyone’s piled into Nvidia, Apple, Dell or is there going to be a general correction, history says there could be a general correction. I am very constructive, let’s say this time next year. And then we really have to wait and see how the ratings are. Have the ratings gotten ahead of themselves? But at the same time, I think you have to understand that after World War I, when we had the Spanish flu and we had a rationalization of fiscal policy that came out of World War I, we had the forgotten depression that everybody ignores. There is risk going forward, and that’s why the Fed needs to start cutting rates now. And that is why they have made a political mistake. Cement is poured. People need to wake up and smell the coffee in it.

AM.: Wow. There is danger in the future. OK. Well thanks a lot Jim.