A world where interest rates remain high – and will potentially increase again – is bad for share prices, writes cjoye.
! It’s a bull market! Equities are cheap! The buy-the-dip-reflex will prevail! Central banks will slash rates and lift their inflation targets! Residential and commercial investment properties paying net yields that are half the return on risk-free cash are still a bargain! Cryptocurrencies with zero intrinsic value and no government guarantees will go to the moon!
Finally, you have to ignore the harsh reality that perfectly liquid, government-guaranteed and risk-free cash deposits are paying interest rates of 4 to 5 per cent annually. To even contemplate allocating capital to something that is illiquid and/or carries high risks of substantial loss, you would want to be banking near-certain risk premia of three to five percentage points above that 4 to 5 per cent risk-free hurdle rate.
This was the highest quarterly inflation the US has suffered since 1988 . In Australia, it is the worst quarterly inflation outcome since 2008 when a 7.25 per cent RBA cash rate and the global financial crisis conspired to eviscerate demand . Since the Fed launched its existential battle against inflation, and jacked up its policy rate by a stunning 475 basis points, the US equities CAPE has started to normalise, falling from 39 to 29 times.
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