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Printed: 08 December 2022 12:24 AM


10 Dec 2021 - Hedge Clippings | 10 December 2021
By: Australian Fund Monitors


Hedge Clippings | Friday, 10 December 2021

Warning bells have been ringing about the impending end of "easy money", low or in some cases negative interest rates, and the impending return of inflation for months, if not years.

And yet, with the exception of the occasional short dip or correction, equity markets have, by and large, carried on regardless. As a result we assume that the market doesn't believe the warnings will ever some to pass, ("tell 'em they're dreamin") or that if they do, the outcome won't be as negative as the doomsdayers are predicting (possible). Of course there will always be some who think they'll make it to the exits in time before the rush (dream on).

The reality is that excessive exuberance always come to an end sooner or later, with the question only surrounding the timing. And it's worth remembering that the larger and longer the party, the greater the hangover (although Hedge Clippings sometimes forgets this in spite of frequent hangovers suffered over the years, but that's another story).

Back to markets: This time, as always, there are differences. The rise of the technology sector. The emergence of cryptocurrencies as an asset (as well as an alternative to the track or casino). The sheer weight of funds in passive investments and ETF's. But chief amongst them - or possibly in part the cause - are the unprecedented levels of liquidity thanks to central bank intervention, and interest rates that a generation ago were unthinkable.

So Hedge Clippings was interested to read in the AFR that ratings agency S&P Global had conducted a stress test to examine how the world would handle a rise in interest rates of 3%, particularly focusing on the $US44 trillion of corporate debt built up over the past decade or so, and in particular that of the loss making "new economy" darlings.

The answer of course is "not very well". However, the question is how likely is it that interest rates will rise 3% from their current levels of 0.25%?  For anyone who remembers interest rates in double figures, and mortgage rates of 18%, a rise of 3% might seem trivial. The issue is that a rise of even half this - say 150 bps will be enough - and possibly more than enough - to spoil not only the equity party, but also the highly leveraged property market as well.


And if it does that, it will certainly dampen the market, and consumers' demand, and one would assume reduce the inflation that the increase in interest rates is aimed at.  There's little doubt that inflation in the real world is higher than the official figures would indicate, but whether it is temporary as a result of COVID, or supply chain issues, or longer term, remains to be seen.

For what it's worth, some of the speculative end of the market has been unwinding anyway, as evidenced by the tech sector.

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