Holy Macro!

 Howard Marks 2024 letter makes some salient prescients on big stuff. He posits: "The investment environment in the coming years will feature higher interest rates than those we saw in 2009-21.  Different strategies will outperform in the period ahead, and thus a different asset allocation [see bottom of page] is called for." Some key memo points follow this bit of art:

In my original Sea Change memo, I listed a number of reasons why we weren’t likely to go back to ultra-low interest rates anytime soon.  The most salient are these:

• Globalization has been a strong disinflationary influence, and it’s likely on the decline.  For this reason – and because the bargaining power of labor seems to be on the rise – I believe inflation may tend to be higher in the near future than it was pre-2021.  If true, this will, all else being equal, mean interest rates will be kept higher to prevent inflation from accelerating.

• Rather than be in a perpetually stimulative posture, the Fed may want to maintain the neutral rate most of the time.  This rate, which is neither stimulative nor restrictive, has most recently been estimated to be 2.5%.

• The Fed might want to get out of the business of controlling rates and let supply and demand set the price of money, which hasn’t been the case for a quarter century.

• Having had a taste of inflation for the first time in decades, the Fed might keep the fed funds rate high enough to avoid encouraging another bout.  To control inflation, one would think the rate would need to be kept positive in real terms.  If inflation will be, say, 2.5%, the fed funds rate would by definition have to be above that.

• Perhaps most importantly, one of the Fed’s essential jobs is to enact stimulative monetary policy if the economy falls into recession, largely by cutting rates.  It can’t do that effectively if the rate is already zero or 1%.

https://www.oaktreecapital.com/insights/memo/easy-money

Bottom of page

This augured a question to sock it to Bard which woke up and made something up:

With the possibility of higher interest rates, certain strategies and asset allocations might appear more favorable compared to the low-rate environment of 2009-21. Here are some options to consider:

Strategies:

• Value Investing: Value stocks, focusing on companies with fundamentals deemed undervalued by the market, tend to outperform growth stocks during periods of rising interest rates. Their lower stock prices compared to future earnings are less sensitive to higher discounting rates.
• Income-Oriented Strategies: Investments emphasizing income generation, like dividend-paying stocks or real estate investment trusts (REITs), can benefit from rising interest rates. Their regular income streams become more attractive as other investment returns potentially decline.
• Shorter-Term Maturities: Investing in bonds with shorter maturities reduces exposure to interest rate fluctuations, minimizing potential losses as rates rise. Consider laddering bond maturities to reinvest maturing bonds at potentially higher rates in the future.
• Active Management: In a potentially more volatile market, active fund managers with strong research capabilities may find opportunities to outperform passive market-tracking strategies. However, selecting skilled managers remains crucial.

Asset Allocations:

• Reduced Equity Allocations: Compared to the equity-heavy allocations popular during the low-rate environment, consider increasing your allocation to less interest-rate sensitive assets like bonds, commodities, and alternative investments.
• Increased Exposure to High-Quality Bonds: While all bonds experience price declines with rising rates, high-quality government or corporate bonds offer greater security and stability for the principal invested.
• Strategic Use of Inflation-Protected Securities: Treasury Inflation-Protected Securities (TIPS) adjust their principal for inflation, protecting against potential erosion of purchasing power in a higher-rate environment.
• Diversification Across Asset Classes: Regardless of specific strategies, maintaining diversification across different asset classes remains crucial to manage risk and capture potential opportunities in various market segments.

Important Note:

• Remember, past performance is not indicative of future results. While these strategies and asset allocations may exhibit historical advantages during rising interest rate periods, future market conditions remain unpredictable.