Hard Landing or Soft Landing - What is a Rate Anyway?
We see everywhere the impact of higher interest rates, but we often don't fully consider what interest rate is relevant to return, and what return is relevant to rate.
Rate and Return are the same thing from two different perspectives. Who's perspective?
Rate - is what you pay as a borrower. You think of it as a big concern because if you have a lower rate you'll make a smaller payment.
Return - is what you earn as a lender. You think of it as a big concern because if you have a higher rate you'll receive a bigger payment.
Rate and Return are the same thing from two different perspectives.
Here's a slide from our CLA designation class where we talk about this dynamic.
When rates go up, someone's return must be going up. When rates go down someone's returns must be going down. We often see this reflected in interest rates earning on checking and savings accounts, and right now on short term bonds.
When you invest in the stock market you are 'lending' you money to the market for a RETURN. When you borrow money you are taking money from the market and you pay as a RATE.
In the last year these bonds are up 300 - 400bps. If you are are retired person you have been earning nothing in your account for 15 years, and now you are earning 2.5-4.5%. This changed behavior, it's good for some, and bad for others. Everything in finance is a ZERO SUM GAME, in that when you have a buyer you have a seller, and vice versa.
TIP: When a client talk to you about lower rate, they want a lower rate because they want to lower the return for someone else, just as you would. They focus on this in terms of cash flow, but you can talk to them about return as well. Looking at the longer term - right now a higher rate means a higher payment and higher return for the lender, but if they buy the total cost has to be compared to the cost of renting and opportunity cost of that money. It's a fun conversation to have, but at least have it with yourself and realize that you are always either a borrower or a lender when it comes to where you decide to locate your money.
Here's a short video on how the FED uses interest rates to stimulate (or depress) the market and the impact on stock prices over time.
MACRO MOVEMENT (WEALTH CREATION) IS TIED TO RATES (EASING OR TIGHTENING) and ECONOMY (GROWING OR CONTRACTING).
We are in Quadrant 4 - your expectations should be limited or 'just get out' is not a bad idea. The best Markets for GROWTH is Quadrant 2. Quadrant 1 and Quadrant 3 can be really good markets but you have to know what you own.
