Below are some of the most interesting articles, quotes and charts I came across this week. Click here to subscribe to our free weekly newsletter and get this post delivered to your inbox each Saturday morning.
Rising interest rates have historically created problems for certain areas of the economy and markets but they may be especially pernicious today given both the speed and magnitude of the rise and the risk-taking behaviors engendered by the extreme monetary accommodation that preceded it.
"I suspect that this most sudden and even violent lurch higher in interest rates is going to test financial structures that came into being during the period of very low nominal interest rates." -Jim Grant https://t.co/1yX1GNU4e8
— Jesse Felder (@jessefelder) October 27, 2023
Certainly, that debt accumulation at the corporate level that was inspired by ultra-low interest rates could prove to be a problem in the quarters ahead as debt maturities grow and interest rates have reset at much higher levels than when those debts were first taken on.
'Treasurers did a good job of locking in low rates when they were available in 2021 but amounts due to be repaid increase noticeably next year and then jump to levels that could be really problematic in 2025 and 2026.' https://t.co/871kHycHNN pic.twitter.com/xHdt85ANlW
— Jesse Felder (@jessefelder) October 25, 2023
In addition, rising interest rates already appear be causing problems in the market for long-term treasuries.
'A vicious circle is foreseeable — where concerns over mounting debt raise real interest rates, which worsen the future debt ratio, and so on.' https://t.co/BvFkV9GfF5 pic.twitter.com/hskWX8mQvk
— Jesse Felder (@jessefelder) October 25, 2023
But the stock market has only just begun to recognize the fact that “risk-free” rates now represent real competition for investor capital for the first time in over a decade.
Want to see a wild chart? This is the boldest outperformance by stocks who pay a 0% dividend since the data commenced in 1927. If we get a mean reversion of any magnitude on this thing, you can say goodnight to the growth-at-any-price framework that is so commonly embraced. pic.twitter.com/IC9TiEY9Fr
— Jeff Weniger (@JeffWeniger) October 26, 2023
And if the rapid rise in rates ends up exerting its normal effect on the economy and earnings in the quarters to come, then this recognition process in equities has only just begun.
'Most times SPX closes below its 3-year moving average one sees rallies in the short term. However, it's important to note that there have been exceptions and some of these have foreshadowed substantial and turbulent market declines.' https://t.co/qaNvobzKSM by @NautilusCap pic.twitter.com/9kmm8UnbGz
— Jesse Felder (@jessefelder) October 27, 2023
Thanks for reading and have a great weekend!
