Decisions were made. Some were reasonable, others less so.
With the world’s economy collapsing in the wake of the COVID outbreak and the resulting clampdown on activity, governments flooded their economies with cash while central banks pushed rates as low as possible. It worked: there was no Great Depression of 2020.
Then, like addicts, well after the warm glow first experienced was no longer possible, societies kept demanding more money for an endless supply of social wants while enjoying the benefits of still decreasing interest rates.
Some claimed there would be no costs. With short term rates below one percent, central governments could borrow an endless supply of money without consequences. Decision makers acted as if debt financing was simply a verse from a Dire Straits song: “money for nothing and your chicks for free” is a great rock and roll verse, but it turns out it’s a terrible economic policy (for those unfamiliar with the song, it’s a satire. It makes fun of those who would believe things of value can be acquired without paying a corresponding cost).
The cost for avoiding a depression in 2020 must be paid, and that time is now.
Rates were too low for too long. Like a rubber band stretched too far, we’re experiencing the economic recoil. Markets suffered last year as rates rose and they suffered again at the end of the third quarter when rates rose again.
High rates drive up the costs of future purchases which drives down the current value of funds set aside for those purchases. Stocks and bonds are tools in service of future expenditures. The value of these tools is being recalculated with each change in rates. For the moment, the only variable in pricing is rates.
There are, of course, other variables in the pricing of investments. They will matter soon enough. As for now, it’s time to exercise the most valuable of the investor virtues – patience.
