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Interest rates have finally gone up. Money has become 2x expensive. Everyone was predicting the bottom would fall out of tech when this happened.... and it h

Interest rates have finally gone up. Money has become 2x expensive. Everyone was predicting the bottom would fall out of tech when this happened.... and it happened. TBH, the fed should not have gone from 0.25 to 0.5 That was really really dumb. They should have gone from 0.25 to 0.3 or something. My guess if the bleeding keeps up, the Fed will have to do a rate cut. Should help things. Since I got downvoted, let me show the math: For an entity borrowing at fed funds rate, on 100B loan that is 250M to 500M annual payment after the hike. If it were 2.5% to 2.75% on 10B, that would be 250M to 275M. See the difference? Even a 50bp hike would just be 20% higher payments. If you're surviving at the edge of these loans, then doubling your payments could easily wipe you out.

walterbell 11y ago
Interest rates are expected to continue rising in 2016.
- zwischenzug 11y ago
  It's interesting that Fed members have downplayed the recent volatility: http://uk.reuters.com/article/uk-usa-fed-dudley-idUKKCN0UT2JE http://uk.reuters.com/article/uk-usa-fed-dudley-idUKKCN0UT2J... '''"The short-term volatility is not something that worries me for monetary policy; it reflects market participants trying to make sense of global developments," Williams told reporters on Friday, adding that he sees no signs of distress or a weak economy in declining asset values, and is unsurprised that stock prices .SPX would decline as the Fed raises rates.''' That's a pretty clear signal that the Fed have knowingly and openly popped a bubble. This is going to be painful.
  - Spooky23 11y ago
    I think there's something to be said for spring cleaning. If your balance sheet is such that the incredibly marginal increase in borrowing costs is anything other than a bump, than you are a dead man walking anyway.
    - blazespin 11y ago
      The economy structured itself around near ZIRP rates. We were at .25 for a long time which gave whole industries (not just VC) the chance to live on the edge of their financing. This wasn't a marginal increase. It was a very dramatic tightening. Marginal would be going from 2.5% to 2.75% or 3% .. this was doubling. And they did not telegraph anything. If you tracked the CME fed funds probability you'd see that it waffled up until a couple of months beforehand and we were at 0.25 for a very long time. The reason 0.25 used to work as a min step was because a) we were never at such low rates for so long before and b) things didn't have a chance to settle into a particular rate structure so it wasn't really an issue. The difference this time was everyone started building businesses based on 0.25 and had time to do so. Agreed, you shouldn't be doing that. But heck, the economy is pretty messed up so the rules have changed.
      - zwischenzug 11y ago
        "And they did not telegraph anything." - are you kidding? It has to be the most telegraphed interest rate rise in history!
        blazespin 11y ago
        Yes, and then they waffled and said they'd do a rate rise based on the numbers coming in rather than any strict ideology of having to raise the rates. When numbers turned south, the CME probability declined.
        Shog9 11y ago
        I'm reminded of folks who ignore evacuation orders during a hurricane, latching on to any small lull as evidence that the storms will lift before it's too late. Of course, one tends to hear these stories after it is too late. No doubt plenty of people ignore the warnings and get by just fine, right up until they don't. And then it's someone else's fault.
      - electic 11y ago
deleted 11y ago
[deleted]
marcosdumay 11y ago
I don't get why people downvote posts like this. Well, I disagree with your comment on policy, but yes, anybody that was on the edge is pretty toasted right now. The important question is whether VCs were there.
- Silhouette 11y ago
  On the other hand, anybody whose financial situation was severely affected by a widely predicted and minimally sized increase in extremely low interest rates was pretty toasted anyway. If you're looking at medium-term financing options -- on the scale of multi-year business loans, mortgage fixed rate periods, and the like -- in most of the Western world, you should probably be considering whether you can afford at least 2.5% interest rate rises over the next few years, not just 0.25%.
  - marcosdumay 11y ago
    The point is, it's not a minimally sized change. You double the interest rate, you half the amount of money big institutions have available to roll around. I happen to think it was a good decision. But why does everyone insist on calling this change "small"?
    - jeffwass 11y ago
      So if the rate was zero, and they increased it by 0.01%, your claim would be that it was an infinite rate increase, and big institutions would have zero money to roll around?
      - marcosdumay 11y ago
        If the rate was zero the, incredibly small attrition banks suffer while creating money would completely determine how much money is in circulation. If not for it, yes, the amount of money would go to infinity, and would get down infinitely much by any positive rate. My point is, this attrition turned up to be incredibly small, and still irrelevant at the US later interest levels.
aNoob7000 11y ago
I think the Federal Reserve telegraphed the rate hike enough. They've been talking about raising rates for over a year now. If you're finances are so shaky that a quarter point rise is going to cause you financial stress then that's your problem. Maybe some of these companies need to start making money and before they are valued at a billion dollars.
roymurdock 11y ago
1. Not all money has become 2x more expensive. Extremely short term loans have become marginally more expensive for the borrower. Mid and long term interest rates remain largely unchanged, on downward trajectory. 2. You changed the amount of principal in your example. A company that goes under due to an expected 0.25% bump in short term interest rates was in extremely poor financial health to begin with. 2. I was under the impression that VC firms typically raise money from a pool of investors and they take a cut of the % return to those investors. How likely is it that VCs are financing a substantial (if any) portion of their investments through short term loans subject to the short term interest rate? 3. The minimum possible FFR adjustment is 25bp (historical, not a hard rule but a custom) 4. Fed does not adjust monetary policy to suit specific sectors of the economy 5. Fed has committed to getting to 2.0% core inflation by 2018 [1] and would not have risked credibility loss by raising rates if it did not intend to continue to hike (and hike fast) [1] http://www.federalreserve.gov/monetarypolicy/fomcprojtabl20151216.htm http://www.federalreserve.gov/monetarypolicy/fomcprojtabl201...
branchless 11y ago
0.05%. Good grief, if you can't run your project on a 25bps increase then sorry your idea might have to go under. As others noted it wouldn't double your payments as tech doesn't have access to overnight rates with zero spread.
cmurf 11y ago
This is just absurd. You're looking at just one part of the economy and whining about 25 basis points? It's just... annoying. Get out of the kitchen if you can't handle a match stick. The last time the housing market was this hot, the federal funds rate was 5.25% or 10x what it currently costs for banks to borrow. Rents from L.A. San Francisco, Denver, Chicago, New York, are climbing at double digit rates year over year. The overwhelming majority aren't getting the kinds of salaries and wage increases to afford such increases. The Fed had only been saying rates need to go up for 2 years before they actually did it, but did the market price this in? Not entirely, a good chunk of the market was in denial about the inevitable.
MathsOX 11y ago
>That was really really dumb. They should have gone from 0.25 to 0.3 or something. That's not how interest rate setting works at all. Plus, the Fed is still using a banded window that encapsulates your five basis point rise. What company is borrowing at Fed Funds rates? If - theoretically, because we have to be quite theoretical to operate under your assumptions - a company was that exposed to interest rates and had zero hedge against interest rate vol they would not have the credit to hope to get funding anywhere near Fed Funds rates. If you're surviving at the edge of loans (i.e - you're in a potential distressed scenario) you'll have bonds trading at a significant discount. This is exactly what began to happen during the early part of 2015, when Fed Fund futures had little chance of the Fed moving priced in.

walterbell 11y ago

Interest rates are expected to continue rising in 2016.

zwischenzug 11y ago
It's interesting that Fed members have downplayed the recent volatility: http://uk.reuters.com/article/uk-usa-fed-dudley-idUKKCN0UT2JE http://uk.reuters.com/article/uk-usa-fed-dudley-idUKKCN0UT2J... '''"The short-term volatility is not something that worries me for monetary policy; it reflects market participants trying to make sense of global developments," Williams told reporters on Friday, adding that he sees no signs of distress or a weak economy in declining asset values, and is unsurprised that stock prices .SPX would decline as the Fed raises rates.''' That's a pretty clear signal that the Fed have knowingly and openly popped a bubble. This is going to be painful.
- Spooky23 11y ago
  I think there's something to be said for spring cleaning. If your balance sheet is such that the incredibly marginal increase in borrowing costs is anything other than a bump, than you are a dead man walking anyway.
  - blazespin 11y ago
    The economy structured itself around near ZIRP rates. We were at .25 for a long time which gave whole industries (not just VC) the chance to live on the edge of their financing. This wasn't a marginal increase. It was a very dramatic tightening. Marginal would be going from 2.5% to 2.75% or 3% .. this was doubling. And they did not telegraph anything. If you tracked the CME fed funds probability you'd see that it waffled up until a couple of months beforehand and we were at 0.25 for a very long time. The reason 0.25 used to work as a min step was because a) we were never at such low rates for so long before and b) things didn't have a chance to settle into a particular rate structure so it wasn't really an issue. The difference this time was everyone started building businesses based on 0.25 and had time to do so. Agreed, you shouldn't be doing that. But heck, the economy is pretty messed up so the rules have changed.
    - zwischenzug 11y ago
      "And they did not telegraph anything." - are you kidding? It has to be the most telegraphed interest rate rise in history!
      - blazespin 11y ago
        Yes, and then they waffled and said they'd do a rate rise based on the numbers coming in rather than any strict ideology of having to raise the rates. When numbers turned south, the CME probability declined.
        Shog9 11y ago
        I'm reminded of folks who ignore evacuation orders during a hurricane, latching on to any small lull as evidence that the storms will lift before it's too late. Of course, one tends to hear these stories after it is too late. No doubt plenty of people ignore the warnings and get by just fine, right up until they don't. And then it's someone else's fault.
    - electic 11y ago

deleted 11y ago

[deleted]

marcosdumay 11y ago

I don't get why people downvote posts like this. Well, I disagree with your comment on policy, but yes, anybody that was on the edge is pretty toasted right now. The important question is whether VCs were there.

Silhouette 11y ago
On the other hand, anybody whose financial situation was severely affected by a widely predicted and minimally sized increase in extremely low interest rates was pretty toasted anyway. If you're looking at medium-term financing options -- on the scale of multi-year business loans, mortgage fixed rate periods, and the like -- in most of the Western world, you should probably be considering whether you can afford at least 2.5% interest rate rises over the next few years, not just 0.25%.
- marcosdumay 11y ago
  The point is, it's not a minimally sized change. You double the interest rate, you half the amount of money big institutions have available to roll around. I happen to think it was a good decision. But why does everyone insist on calling this change "small"?
  - jeffwass 11y ago
    So if the rate was zero, and they increased it by 0.01%, your claim would be that it was an infinite rate increase, and big institutions would have zero money to roll around?
    - marcosdumay 11y ago
      If the rate was zero the, incredibly small attrition banks suffer while creating money would completely determine how much money is in circulation. If not for it, yes, the amount of money would go to infinity, and would get down infinitely much by any positive rate. My point is, this attrition turned up to be incredibly small, and still irrelevant at the US later interest levels.

aNoob7000 11y ago

I think the Federal Reserve telegraphed the rate hike enough. They've been talking about raising rates for over a year now. If you're finances are so shaky that a quarter point rise is going to cause you financial stress then that's your problem. Maybe some of these companies need to start making money and before they are valued at a billion dollars.

roymurdock 11y ago

1. Not all money has become 2x more expensive. Extremely short term loans have become marginally more expensive for the borrower. Mid and long term interest rates remain largely unchanged, on downward trajectory. 2. You changed the amount of principal in your example. A company that goes under due to an expected 0.25% bump in short term interest rates was in extremely poor financial health to begin with. 2. I was under the impression that VC firms typically raise money from a pool of investors and they take a cut of the % return to those investors. How likely is it that VCs are financing a substantial (if any) portion of their investments through short term loans subject to the short term interest rate? 3. The minimum possible FFR adjustment is 25bp (historical, not a hard rule but a custom) 4. Fed does not adjust monetary policy to suit specific sectors of the economy 5. Fed has committed to getting to 2.0% core inflation by 2018 [1] and would not have risked credibility loss by raising rates if it did not intend to continue to hike (and hike fast) [1] http://www.federalreserve.gov/monetarypolicy/fomcprojtabl20151216.htm http://www.federalreserve.gov/monetarypolicy/fomcprojtabl201...

branchless 11y ago

0.05%. Good grief, if you can't run your project on a 25bps increase then sorry your idea might have to go under. As others noted it wouldn't double your payments as tech doesn't have access to overnight rates with zero spread.

cmurf 11y ago

This is just absurd. You're looking at just one part of the economy and whining about 25 basis points? It's just... annoying. Get out of the kitchen if you can't handle a match stick. The last time the housing market was this hot, the federal funds rate was 5.25% or 10x what it currently costs for banks to borrow. Rents from L.A. San Francisco, Denver, Chicago, New York, are climbing at double digit rates year over year. The overwhelming majority aren't getting the kinds of salaries and wage increases to afford such increases. The Fed had only been saying rates need to go up for 2 years before they actually did it, but did the market price this in? Not entirely, a good chunk of the market was in denial about the inevitable.

MathsOX 11y ago

>That was really really dumb. They should have gone from 0.25 to 0.3 or something. That's not how interest rate setting works at all. Plus, the Fed is still using a banded window that encapsulates your five basis point rise. What company is borrowing at Fed Funds rates? If - theoretically, because we have to be quite theoretical to operate under your assumptions - a company was that exposed to interest rates and had zero hedge against interest rate vol they would not have the credit to hope to get funding anywhere near Fed Funds rates. If you're surviving at the edge of loans (i.e - you're in a potential distressed scenario) you'll have bonds trading at a significant discount. This is exactly what began to happen during the early part of 2015, when Fed Fund futures had little chance of the Fed moving priced in.