The Greatest Show On Earth

It was great entertainment. The characters were even better.

In 2004, a new kind of reality show hit the airwaves. The Apprentice pitted contestants to complete business tasks each week. All vying for an executive role carrying a $250,000 salary.

The winning team was safe until the next challenge. The losing team had to face one of the most charismatic business personalities of the time: Donald Trump.

It made for great TV. And it swept the nation with viewers waiting each week for Trump’s trademark phrase “You’re fired!”

Love him or hate him, you have to admit that since his days as a reality TV host, Trump is nothing if not entertaining. Everyday is an adventure. You never know what will happen.

And last week, he returned to his roots as “the boss.”

What’s happened over the last two weeks is either historic or entertaining, depending on who you ask. On August 20, Federal Housing Finance Agency (FHFA) Director Bill Pulte released evidence that Governor of the Federal Reserve Lisa Cook may have committed mortgage fraud.

Cook is a career bureaucrat. She assumed her role of Fed Governor in 2022.

That was after a sort of mini-scandal involving suspicious stock trades from Dallas Fed president Robert Kaplan, Boston Fed president Eric Rosengren and Fed vice chair Richard Clarida.

All three of those Fed officials caught up in the scandal resigned.

With Cook, it appears she cheated the mortgage application process to get lower interest rates on multiple home loans. Then lied about the use of each property on official U.S. Government forms.

When pressured to step down, Cook said no.

So President Trump brought back the spectacle. After his own pressure campaign to get Cook to resign didn’t work, he publicly fired her on his Truth Social platform.

Cook responded by filing a lawsuit against the firing.

Now that said, it’s still early days as far as the investigation into any potential mortgage fraud.

If proven true, it may be a classic case of “Rules for thee, but not for me!” It’s clearly illegal to lie on a mortgage application. Or on any U.S. Government documents.

Regardless, the story is captivating the financial world. Every response prompts a breaking alert flashing across the screen.

Just like with The Apprentice, people can’t get enough.

And it’s all running in-line with President Trump’s pressure on the Fed.

It’s no secret that President Trump is putting as much pressure as he can on the Fed to lower interest rates. Including on Fed Chair Jerome Powell, who sort of tipped his hand as I talked about last week.

But if this firing sticks – which looks more than likely – it gives Trump another advantage. It lets him appoint a new Fed Governor. One that will probably be more agreeable.

But at the end of the day, none of this matters.

It may be entertaining. But it’s all theatre. It’s all for show.

It’s like the “bread and circuses” of our day. The circus being the spectacle of it all. The bread coming soon as the Fed gets ready to cut rates.

Instead of focusing on the circus, what we need to do next is figure out how to position our portfolios for the future.

Today, large-capitalization stocks rule the roost. Think of names like Nvidia, Amazon and Tesla.

They’ve outperformed just about everything.

But when things get to an extreme, there’s usually a reversal. That doesn’t mean we’ll see a massive market crash. All it means is we may see overlooked sectors of the market outperform large-cap stocks.

Like small cap stocks.

The funny thing is, small-cap stocks tend to get a boost when the Fed lowers interest rates after a rate-hike cycle.

Back in 2000 after the internet bubble popped, the Fed lowered interest rates from 6.5% to just 1% by 2003.

Between 2000 and 2006, large-cap stocks –as measured by the S&P 500 Index – lost about 3% overall.

However, small-cap stocks – as measured by the Russell 2000 Index – gained 60% over that same period. Meaning small-cap stocks smashed the performance of large-cap stocks as the Fed cut rates to try and stimulate the economy.

And we may be headed for another similar scenario today.

One thing we can look for here is inflection points. For the small-cap world, we can do that by comparing the S&P 500 Index - made up of large-cap stocks - to the Russell 2000 Index, which is made up of small-cap stocks.

When the ratio is higher, it means investors are betting far more on large-cap stocks. When it’s lower, they favor small-cap stocks.

And today, the ratio, is near an all-time high. Meaning investors are clearly favoring large-cap stocks.

In fact, it’s not far from the high set back in 1999. Just before small-cap stocks took off and left large-cap stocks in the dust.

So while the Lisa Cook drama may be all everyone is talking about, it’s just for show.

The real fireworks probably start when the Fed caves and lowers rates.

When that happens, small-cap stocks – and the warrants of small-cap companies like the ones I recommend in Strategic Trader – may be off to the races.

Regards,

Editor, Strategic Trader