5 ms·

"If inflation continues and the fed becomes aggressive with hiking, all assets are dead." This sounds incredibly short-term-oriented and alarmist. Dead is a wo

"If inflation continues and the fed becomes aggressive with hiking, all assets are dead." This sounds incredibly short-term-oriented and alarmist. Dead is a word to describe the end of something's existence. Market turbulence is not a novel occurrence, nor are unsustainably inflated economies driven by cheap money and speculation.

draw_down 4y ago
fny 4y ago
At 10% rates I think the fair value of the S&P becomes something like 2000 assuming the same earnings. High yield rates would moon and tons of bankruptcies would ensue. Consider how heavily pensions and retirement accounts are concentrated in stocks. The ramifications of reaching a point like that would be devastating, so yes, I think dead is not alarmist but appropriate.
- scarab92 4y ago
  That's only true if investors think the 10% rates are permanent. Future interest rates are a time series not a single value, and I suspect most will use a lower rate in later years reflecting some mean reversion.
  - qq66 4y ago
    But you can lock in rates for decades.
  - MR4D 4y ago
    A 10% rate on a 30-year treasury, is for all intents, permanent. Think of it this way - a person buys a 30-year bond yielding 10%. Then, for the next 30 years, no matter what happens to interest rates or prices, they will earn a 10% return on their original bond purchase, risk free. Remember also that 30 years is approximately your adult working life, so a really long time that people tend to think of a “permanent”. Is it truly permanent? No, but for purposes of discussion and financial planning, it’s close enough.
- nl 4y ago
  US 10 year bond rates are 3.1%. The one time in history they have gone beyond 10% it took 2 years to go from 7.32% in Sep 1977 to reach 10% in October 1979, and then peak at 15% in 1981. It's not impossible bonds will reach 10% again. But it seems unlikely, and it seems safe to think it would take 3+ years to get there. https://www.macrotrends.net/2016/10-year-treasury-bond-rate-yield-chart https://www.macrotrends.net/2016/10-year-treasury-bond-rate-...
  - pas 4y ago
    OP probably meant corporate bonds? (otherwise I also think it's just wildly unrealistic)
    - lumost 4y ago
      OP may have speculated on outlook for the next decade, it’s possible that interest rates rise and inflation remains. This would be the case if inflation is not a domestic phenomena land is instead driven by war, china, and tariffs.
      - noduerme 4y ago
        You forget very expensive crop failures caused by environmental degradation and global warming, too. India just went from promising wheat to fill the supply gap left by Ukraine to banning the export of wheat within the span of a month. Queensland's drought and now flooding is a separate disaster. It's not just too much money chasing too few microchips or cars because of logistical issues or covid shutdowns; it's too much money chasing shortages of highly inelastic basic requirements for survival, like bread and milk. This is the sort of thing that contracting the money supply can't fix, because it's not excess consumption that can be discouraged away. Considering inflation in the UK just hit 9%, EU 7.8%, even Japan going from deflation to 2.5% inflation, it seems probable this is a long haul global problem. It's a really lousy environment when the dollar is inflating and strengthening against other currencies at the same time. Higher interest rates will tamp down spending on discretionary goods, but much less so the inelastic ones we're seeing shortages of; nor will they drive investment to create more of what can be created.
michaelcampbell 4y ago
Lighten up, you know exactly what he meant by "dead". </literal-net>

draw_down 4y ago

fny 4y ago

At 10% rates I think the fair value of the S&P becomes something like 2000 assuming the same earnings. High yield rates would moon and tons of bankruptcies would ensue. Consider how heavily pensions and retirement accounts are concentrated in stocks. The ramifications of reaching a point like that would be devastating, so yes, I think dead is not alarmist but appropriate.

scarab92 4y ago
That's only true if investors think the 10% rates are permanent. Future interest rates are a time series not a single value, and I suspect most will use a lower rate in later years reflecting some mean reversion.
- qq66 4y ago
  But you can lock in rates for decades.
- MR4D 4y ago
  A 10% rate on a 30-year treasury, is for all intents, permanent. Think of it this way - a person buys a 30-year bond yielding 10%. Then, for the next 30 years, no matter what happens to interest rates or prices, they will earn a 10% return on their original bond purchase, risk free. Remember also that 30 years is approximately your adult working life, so a really long time that people tend to think of a “permanent”. Is it truly permanent? No, but for purposes of discussion and financial planning, it’s close enough.
nl 4y ago
US 10 year bond rates are 3.1%. The one time in history they have gone beyond 10% it took 2 years to go from 7.32% in Sep 1977 to reach 10% in October 1979, and then peak at 15% in 1981. It's not impossible bonds will reach 10% again. But it seems unlikely, and it seems safe to think it would take 3+ years to get there. https://www.macrotrends.net/2016/10-year-treasury-bond-rate-yield-chart https://www.macrotrends.net/2016/10-year-treasury-bond-rate-...
- pas 4y ago
  OP probably meant corporate bonds? (otherwise I also think it's just wildly unrealistic)
  - lumost 4y ago
    OP may have speculated on outlook for the next decade, it’s possible that interest rates rise and inflation remains. This would be the case if inflation is not a domestic phenomena land is instead driven by war, china, and tariffs.
    - noduerme 4y ago
      You forget very expensive crop failures caused by environmental degradation and global warming, too. India just went from promising wheat to fill the supply gap left by Ukraine to banning the export of wheat within the span of a month. Queensland's drought and now flooding is a separate disaster. It's not just too much money chasing too few microchips or cars because of logistical issues or covid shutdowns; it's too much money chasing shortages of highly inelastic basic requirements for survival, like bread and milk. This is the sort of thing that contracting the money supply can't fix, because it's not excess consumption that can be discouraged away. Considering inflation in the UK just hit 9%, EU 7.8%, even Japan going from deflation to 2.5% inflation, it seems probable this is a long haul global problem. It's a really lousy environment when the dollar is inflating and strengthening against other currencies at the same time. Higher interest rates will tamp down spending on discretionary goods, but much less so the inelastic ones we're seeing shortages of; nor will they drive investment to create more of what can be created.

michaelcampbell 4y ago

Lighten up, you know exactly what he meant by "dead". </literal-net>