A whole generation of financial advisors lack any sense of history
Talking heads parsing minor changes in the Federal Reserve policy rate are misguided
The U.S. Central Bank policy rate has been as low as 1% and as high as 20% during my investment years. The current rate is not “high” and needs no adjustment. Tinkering with policy rates has become a Fed pastime as if the changes were the primary factor in economic growth or contraction, but the reality is the tinkering is intervention where no intervention is needed or warranted most of the time.
There is not a day that goes by on Bloomberg or MSNBC or CNBC or BNN where at least one talking head is predicting when the next Fed rate change will take place and how many rate declines they expect in 2024. A collossal waste of time and intellect.
For most of the past 62 years, interest rates (defined as the Fed policy rate) have been north of 5%. Long term economic growth of 3% to 4% and inflation at or near the Fed’s “target rate” of 2% implies a sensible interest rate environment is for rates that allow bond holders a real rate of return on the funds they pony up to government to keep the transfer payments flowing to those incapable or unwilling to look after their own financial affairs and need handouts from those who earn the money that fuels the economy. At 5.33 percent, the current “policy rate” implies returns to bond holders on “risk free” [as if any investment could ever be risk free] bonds of around 2 to 3%. I don’t know about you, but if I could only earn 2 to 3% on my money I wouldn’t invest it any financial product but would use it build things - like homes, factories, vehicles, clothing, furniture, and all the things we need to get through life with a roof over our heads. When Blair’s first moved to Canada from Ireland in 1790, there was no Fed, no government handouts, no public health care, no publicly funded school system, and no government debt of any magnitude. My ancestors looked after themselves and their neighbours. Most of them lived to be close to or more than 100 years of age. My Dad was one of eight children - five girls and three boys. Four girls all made it into their hundreth year (or higher) and my Dad and his older brother to 98. Only my Dad’s youngest brother and fifth sister left early owing to cancer. It is a reasonable guess that their cancers arose from issues under government control.
We now have highly paid “economists” and “advisors” who think society benefits from higher prices for financial products (stocks, bonds, ETF’s, etc.) when it its tautalogical that higher prices for securities (which are no more than claims on physical assets capable of producing a product or service and earning a profit doing so) compel lower returns to investors. If you pay more for the same interest in the same earnings stream you will get a lower return on your investment.
But that is too complex for thirty something MBA’s to grasp, and well beyond the ken of today’s lot of “advisors” who instead peddle the idea that you can “outperform” the market by buying or selling securities based on their advice. Some of you will, most won’t, but as a group all investors will simply earn less and the “advisor class” will earn fees and commissions becoming relatively wealthy at your expense. They reduce the thought process about where to place your investment dollars to the current quarterly earnings release, some popular multiple like price-to-earnings or EV to EBITDA and a host of unsubstantiated assumptions about future commodity prices, wage rates, etc. to prompt you to trade. Makes sense, since if you didn’t trade or pay them to trade on your behalf, they would have to actually work for a living.
Real wealth from investing comes from buying interests in profitable, dividend paying companies with clean balance sheets and competent management producing useful products and growing more or less in line with the economy. Fads promoted by advisors (like cryptocurrencies, DEI, ESG, carbon capture, renewable energy) rarely lead to good outcomes for anyone but the advisor class. CO2 is harmless but promoting fear or greed or “social justice” to fuel trading benefits money managers and comes at the expense of your pension fund’s returns.
It is time for central banks to stop intervening in the economy and governments to turn back the clock to when democracies were based on personal freedom, balanced budgets, limited regulation and essential services. Tinkering with policy rates doesn’t advance society and necessary government interventions in the economy are a second derivative of government intervention in the economy. Left alone and regulated only to prevent monopolies and frauds, the economy would work just fine.
That's a fascinating chart. And a great article. Will be really interesting to see how things transpire interest rate wise. I've loaded up on fixed income during maximum pessimism last year. It's funny how people think the last decade is normal for interest rates. I'd be quite happy if they stayed around the 5% level for the next decade.