OK, so interest rates have been yanked off the ground much to their (and our) horror. After a nice long slumber on Ground 0. This whole saga started in the beginning of 2022 – I had to google that since it felt too long ago.

But yeah, 2022. And for 2yrs markets, investors and the entire financial sphere shrugged it off. No biggie. The cost of money only inflated to cough, cough over 5%. Making for a bizarre reason why we saw no recession. Yet.

Monetary conditions are measured by the 2 things: a) the cost of money and b) the supply of it. And when the cost of money goes up while the supply of it goes down you get a situ that’s a bit tricky. You generally get a slowdown in the economy as money (liquidity) gets pulled out the system along with it being more expensive to borrow, and well borrow!

Since we live and breathe credit, you can bet it pokes a whole. As of Q4 of last year, Americans have a whopping $1.13 trillion in consumer debt! That’s over ONE TRILLION DOLLARS in credit card debt. So you can see how higher interest rates sort of dampen the party. And if we’re stuck with ‘higher-for-longer’ this is what will matter most to your portfolio going forward.

And all else being equal (which, ha – spoiler: they aren’t) you’d expect the economy to shrink. And hey presto, bring on the R-stuff. Recession! But it’s been a full 2yrs since the financial conditions started to get just a little-too-tight.

And yet, the tight outfit still fits. Even though we’ve been stuffing our face with cake. Miracle, huh? At some point you might wanna argue things might rip but for now, all’s good. 

I know, I know. There’s a big fat lag to interest rates. That they can’t possibly move through the economy so quickly. Give ‘em time! Yeah, well, they’ve had 24 months. However, it’s argued that they take anywhere between 12-18 months after the LAST hike.

The last time the Fed hiked was July ‘23. So being generous, the effect of higher interest rates should (this term should be hold extremely loosely) start hitting somewhere around Q1 2025. That leaves us with a couple more months to party WHOOOOOO. Erm, no. Not advisable. We’re talking about investing here. Move along. 

But, putting that less-than-perfect guesswork aside – why haven’t markets kinda priced this in? I mean, they’re forward-looking beats aren’t they?

Too bored with the present that they look into the future and start messing around with the price of things. Just to show us who’s really the boss. 

The fiscal train ain’t stopping 

OK, money is expensive. So what? When the Fed decides to splash out on all sorts of things (incl the cost of money it itself decided to increase the price of – LOL) you start to get more $$$ floating around. And they don’t fly away. They fly into people’s pockets. They find their way into all sorts of places. 

The congressional budget office projects fed budget deficit to hit $20 trillion within the next 10yrs and fed debt held by the public to hit 116% of GDP. These aren’t pretty numbers fellas. They’re big scary ones.

More spending = more inflation = less purchasing power. And with a presidential election in just a few months – you can count on one 2 things : 1) the Fed ain’t raising rates no more and 2) no one is cutting spending. Reversed, these 2 things bring about a pretty nasty shock to the system.

But we’ll get back to why #1 might change…

This money manager got it totally wrong (for now) and paid the price 

No idea if you’ve heard of Ruffer – but they’re an investment house but they’re a cool & contrarian bunch. What caught my attention was when they invested in bitcoin back in Nov 2020 I think. Basically a real novel thing to do. For a money manager. A lot has happened in 4yrs. Back then (and still now to be fair) it was a pretty bold move.

Anyway, their thesis was that the Fed have hiked rates to levels not seen since pre-GCF and eventually, something, somewhere is gonna break. So they went full-on defensive mode (aka loading up on bonds) where basically now 50% of their portfolio is in short-dated gov bonds. SUPER cautious. And as we all know, equities took off instead. Over the past year alone, the S&P 500 was up more than 20%. So they got that big bet wrong. Speaking of, tech is up 70% since 2022 – the trick is knowing when to turn your paper profits into proper ones!

No one really knew that stocks would go up as rates go up (usually the opposite is true – stocks go down when rates go up) but there was all this stuff that no one predicted: gov spending would dominate. Big time. It would replace all the tightness that higher rates would have caused and gave a boost to the system.

Ruffer betted against stocks at the wrong time. So they lost out. Now, they’re firing 6% off their workforce after a really bad stretch. So you can see how being on the wrong side of things can be tough. 

OK, so these guys have clearly been wrong for ages. Of course, all can change in the blink of an eye. 

Will the hoped-for rate cut turn out to be a rate hike?! 

The Fed is now dangling the prospect of the next rate move being a hike!! Inflation is too strong for their liking. After all, their literal job is to have inflation ~2%. More / less than that and they’ve objectively failed. So, global markets had a little wobble 

But we’ve got a weird dynamic where copper is going up (not just because of China – in fact they’re actually not the main cause of it) and there’s this thing called ‘Dr Copper’ where the price of copper is basically a rough indicator of the health of the economy. High copper prices is down to high demand.

Which means economy is growing (not shrinking). So we have strong economy + high rates. Things look OK for now hence no major wobble has surfaced. But this strong demand does not bode well for cutting rates.

And with an election in Nov I can’t see the Fed hiking rates into a presidential election (nor cutting them so near to Nov – it’ll look like favouritism) so we just gotta sit tight and let it play out. Psst: the 2024 election got you spooked? Look to this asset for long-term protection.

The US is *still* very expensive

Remember, the US is trading on extremely high multiples a) relative to its own history and b) relative to other countries. That is crystal clear. And earnings season has kicked off. You better expect these firms to deliver or else they’ll be delivering something we’d all rather avoid.

Who knows what will happen to stocks going forward – just be prepared for the tide to turn at any point. And don’t be afraid to go against the crowd. Being early (and wrong) is better than being late (and right). Markets reward patience; they so rarely reward latecomers and copycats.

But a really handy trick is to not have most your portfolio in one country (cough, cough the US). Things have gotten so concentrated in index world that it’s impossible to avoid the big beasts that dominate literally everything. It does, however, mean you’re exposed to a lot more country-specific risk than you might otherwise be comfortable with.

The US has been like a rocket with endless energy but taking profits never hurt anyone and remember, paying a high price for stocks means they need to perform extremely well in the future for you to eventually make your money back.

Don’t be fooled – nothing lasts forever I promise you. So don’t be scared to add % of your capital to different countries with different growth dynamics. And different interest rate regimes. It’ll shelter you. One day! 

Disclaimer: This blog is not investment or financial advice. It is my opinion only. This blog is not a personal recommendation to buy/sell any security, or to adopt any such investment strategy. Always do your own research before you commit to any investment.