Interest rates tend to move in very long cycles. They dwarf the career of most financial professionals therefore it is important to understand not only what has happened over your career but what happened well before that as well.
Ray Dalio has done some exceptional work on the long-term debt cycle and I would thoroughly recommend that all advice professionals read his work “Principles for Navigating Big Debt Crises”.
Since 1990 the direction of Australian interest rates has been down. This has led to a one-way direction for asset markets including the beloved residential property market.
Since the Great Financial Crisis we have seen unprecedented actions by Central banks including the lower of interest rates and other measures such as Quantitative Easing. This was all done on the back of the fact that there was no inflation and there were no immediate ramifications from such actions.
The world is now changed, and inflation has come back which means the one way ride has now ended. Whilst there are many divergent views which is exactly what drives financial markets if inflation is going to remain in any way shape or form then the question becomes what next?
The other consideration is the fact that the levels of public debt are historically very high, and this will mean the ability to lift interest rates will be restricted. Many are surprised that interest rates have gone as high as they have with only relatively minor harm including a Gilt crisis on pension funds and banking collapses in the US.
Interest rates are important for all asset classes as they are the key determinant to the opportunity cost of placing your funds. However, they are first and foremost to interest denominated investments such as short-term money markets and long-term debt markets (bonds). This becomes even more important if inflation is running at a level higher than the nominal return on the investments meaning investors are losing in real terms.
We are being particularly specific about where we are investing our clients’ “defensive” assets and I suggest that all investors need to be reviewing the strategies that have worked in the very distant past.
Rob Coyte is the CEO of the Shartru group. He can be contacted on 1300 478 424 or rob@shartru.com.au.