How Not to Predict Interest Rates
We continue our hiatus from capital destruction to look further at interest rates. Last week, our Report was almost prescient. We said:
The first thing we must say about this is that people should pick one: (A) rising stock market or (B) rising interest rates. They both cannot be true (though we could have falling rates and falling stocks).
We write these Reports over the weekend. At the time of last week’s writing session, Friday’s close on the S&P was 2757 (futures). Monday this week saw a crash, with the S&P down to 2529 at the low point in the evening. That is a drop of -8.3%.
We are not stock prognosticators, and we will neither tell you “short the market” nor “buy the dip”. We have a different point to make.
Rising interest rates, by a variety of mechanisms, cause stocks and all asset prices to go down. We have touched on a few in this Report. One is that investors have a choice between the risk-free asset—the Treasury bond—and anything else (note: the Treasury bond is not risk free, but if it defaults then everything else will be wiped out in the collapse). Why would they accept a lower yield on stocks along with the greater risk? Another is that corporations can borrow to buy their own shares. Management may do this if the interest rate is lower than their shares yield. But they can sell shares to pay off debt if the shares have lower yield than the interest rate.
Let’s look at a few more.
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