June 17, 2021
By Scott Wohlers
It was subtle, but this week the Federal Reserve signaled that it is planning for the removal of accommodating monetary policy. It also acknowledged that both growth and inflation are likely to be higher this year than it had previously forecasted. Chairman Powell stuck by the assessment that inflationary pressures would be transitory (short-lived) but with less conviction.
All this poses challenges for investors. For fixed income it reiterates the simple logic that these low rates are not forever, and higher ones are inevitable. For equities, real estate, and many other hard assets, valuations need to factor in higher capitalization rates. In other words, the multiple that one should pay for future cash flows needs to be reduced.
None of this is new. Every thinking investor could see this coming. Markets have already begun adjusting. It is still hard to let go of the candy of enormous liquidity driving asset prices higher and higher. It may be more realistic, it may be good for us, but it is not nearly as much fun. The Bull has been discussing this in blogs for some time now. He and his partners have also been tilting strategy to this inevitability. It has been and will continue to be a balance between benefiting from the current forces and preparing for change. Stay steady my friends.
The Lonely Bull
