The Dow Jones has followed the S&P 500 index and Nasdaq into a bear market. I am shocked. I am shocked not because they have fallen into a bear market. I am shocked that people are shocked that US stock markets have drop 20% from a recent high.
Sterling has crashed to a level where it is flirting with parity against the US dollar. I am shocked. I am shocked not because sterling has fallen so much, so quickly. I am shocked that people are shocked that sterling has crumbled following the UK Chancellor’s preposterous giveaway budget.
We need to wake up. We all need to wake up. Interest rates are on the up. There is, unfortunately, no easy alternative to bring down inflation. Those who think there could be, are probably also fans of Bucks Fizz’s 1982 hit song The Land of Make Believe. I will spare you the trouble of looking it up. The first four lines goes like this:
“Stars in your eyes, little one. Where do you go to dream? To a place, we all know. The land of make believe.”
Sadly, the land of make believe doesn’t exist. And the disillusioned dream of Utopia could turn into a nightmare, as asset prices get dragged lower by the weight of interest rate hikes. Make no mistake. Central banks will continue to hike interest rates, even if it means slowing economic growth to the point of recession.
These banks have little or no control over which of the four asset classes, namely, cash, bonds, property, and shares lose ground. When central banks use sledgehammers to crack nuts, we inevitably end up with crushed nuts.
To date, we have already seen many currencies lose out against the US dollar. Bond prices have tumbled to the point where they could destabilise an entire financial system. The Bank of England had to step in at the last minute to temporarily prevent a total collapse of the UK pension industry after bond yields shot up.
So too have shares, as many of us are probably well aware of. Our share portfolios are probably worth less today than at the start of the year. That’s what happens when interest rates rise.
Curiously, property prices have so far appeared to be resilient, except in some economies. The question is why. Why has property been able to defy the gravitational pull of rising interest rates?
Perhaps it is because demand for property still exceeds available supply. But that could change quickly as the reality of penal mortgage repayments dampen an urge to own a collection of bricks and mortar. Demand for those fixed assets might also be curtailed when bond yields, dividend yields, or even interest rates on savings accounts, start to trump rental yields.
Point is, the entire financial ecosystem revolves around interest rates. So, it might only be a question of “when” rather than “if” cracks start to appear in the global property market. When that happens, we shouldn’t be too shocked. But we should be shocked when people say they are shocked that it has happened.
So, how does that last stanza of that Bucks Fizz song go? Here it is… “I’ve got a friend who comes to tea. And no-one else can see but me. He came today. But had to go. To visit you? You never know!“
Be prepared. It is considerably better than being shocked.
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