Ataraxia Financial Newsletter - July 2023
Another Thought About the Importance of Interest Rates and the Current Environment
„Perhaps more fallacies have been committed in discussions concerning the interest rate than in the treatment of any other aspect of economics. It took a long while for the crucial importance of time preference in the determination of the pure rate of interest to be realized in economics; it took even longer for economists to realize that time preference is the only determining factor. Reluctance to accept a monistic causal interpretation has plagued economics to this day“
— Murray N. Rothbard (Man, Economy, and State)
Tuesday, August 1st. Rawai Beach, Phuket.
I am back in Phuket, enjoying the relaxing island life once more. 🥥🌴🌞
When I was here a year ago, it was just right after Thailand had opened up tourism again and the island still felt quiet and almost abandoned.
Now, the atmosphere is quite different. A lot of tourism is flooding the island again.
Here in the Rawai Beach area, it feels like there are more Russian than Thai people nowadays. And from what I can tell, most of them are not really tourists. They are here to stay. Most of them are young and Russia currently obviously does not seem to offer a good deal for young people. Apparently not a preferred place for settlement with a bright future ahead. And since they are faced with racist discrimination across the (self declared) pro freedom and free choice democratic nation states of Europe, it seems some have found a nice environment here to relocate and try settling — who can blame them?!
Besides that, there are a lot of Chinese tourists who weren’t here at all last year (Covid was still a very dangerous thing back in those old days 🤣🤣🤣)
Also lots of European and some Australian tourists have found their way here.
The atmosphere is peaceful, happy and warm. It’s really quite enjoyable… hard to find time to sit down and analyze numbers and charts…
…and write a newsletter. 😅
Therefore, I didn’t spend too much time pondering about the markets and gonna keep it quite brief.
However, I was listening to a great podcast featuring Howard Marks, who is definitely one of my favorite individuals in the whole investing universe.
He was putting forward the idea that the decline in interest rates was the biggest single event in the economy for the last 45 years. And he further speculated that most investors would not come up with this answer, when asked the question.
Here is a long-term chart of the 10-Year Treasury Yield:
I totally agree with Marks on this point.
Now, that the FED sees itself challenged with inflation on the one hand (it should hike rates to fight it) and facing enormous debt levels across the whole economy on the other hand (high interest rates will lead to further slowdown and potential collapses), it has decided to raise its rate once more to 5.25-5.50, a level not seen for 22 years.
Looking at the above chart shows a clear indication of how this breaks a 40+ year long trend of declining interest rates. That is what Howard Marks is talking about.
An environment of declining interest rates has many consequences on the economy. In short, it is what encourages debt and makes asset prices go up. It’s not only the reason for growth in the debt level and skyrocketing housing and stock prices, but also a major contributor of why the divergence between the rich and poor has increased so much.
We will see where the rates are going from now. I still think that the economy can’t sustain these rates and is on the brink of having a bankruptcy avalanche, but I need to be honest and admit that I did not expect we could see such high rates without causing way more havoc. While we are seeing more bankruptcies and had some of the largest bank collapses, the ultimate collapse that leads the Fed to cutting rates and re-engaging in QE has not happened so far.
Back to the basics of interest rates…
The important thing to understand is, that these interest rates are not a natural phenomenon, but they are decided by a committee… almost nobody in the public media will say that, but let’s be honest and face it: It's 100% soviet style central planning.
I have always been fascinated by the economic phenomenon of price discovery and reading Hayek’s famous essay The Use of Knowledge in Society was enormously influential for me. In this essay, he eloquently lays out the reasons for why a free market is required for achieving a well functioning pricing mechanism. Moreover, such a pricing mechanism is the backbone that underlies a productive economy in which people can make the right decision and prosper.
Many people realize that the interest rate is important in economics, but I think most people don’t really think about it a lot and grasp the fundamental importance of it.
The interest rate is the price of money itself. It is the cornerstone of the pricing mechanism. When it changes, then everything else needs to change and adjust.
Everybody has desires for various things and we act accordingly to achieve our goals. Our actions are in accordance with the world that we are facing and a lot of it is influenced by the prices that we see and evaluate. Thus, the interest rates affect our time preference and therefore indirectly influence many of our daily decisions.
And… I would argue that many — if not all — of the crazy things that have developed in the last decades stem from the fact of artificially meddling with the interest rate and keeping it unnaturally low.
Here is a graphic that seems crazy, but can perfectly be explained by suppressed interest rates:
Low interest rates will lead to better valuation of long-term projects that are expected to pay off in the future. Thus, it is no wonder that most of the stock market gains have come from the technology sector. The recent AI craze just adds another layer on top of it.
Here are the indicators for July:
And here is one more interesting chart I came across a few days ago:
If the FED keeps fighting inflation, my guess would be that we are going to see even bigger bubbles on that chart over the coming years.
Inflate or die.
Have some allocation in assets that can’t be inflated, can’t go bankrupt, and can’t be easily confiscated (there is one in particular, which meets all of these criteria 🔥🚀🔥).
That’s all for this month. Hope everyone has a successful and productive August and I’ll talk to you next month. 🙂
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Best regards,
Disclaimer: The content of this newsletter is for informational and educational purposes only. It contains my personal views and opinions, which are not to be taken as direct investment advise. All investments have risks and you should do your own due diligence before making any investment decision. If you require individualized advice, to review your unique situation and make a tailored advice for you, then contact a certified financial planner or other dedicated professionals.
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