Higher for Longer

Interest rates are now expected to remain high for much longer than most investors had previously expected. Inflation has come down substantially over the past year but is getting sticky around three percent. The Bull and his partners warned that this was likely some time ago. The Federal Reserve’s target of two percent looked unrealistic to us; it still does.

The recent run of two percent inflation was a historical anomaly; three percent has been the norm. In a world deglobalizing, growing older with its attendant costs, and the need for more military spending, three percent inflation may be the best that can be expected.

We have also stated many times that we thought that longer term interest rates would have to rise further. That is now happening. After all, higher inflation requires higher rates to provide a real return (one above the inflation rate) and account for risk and volatility. The stock market has not been pleased and has sold off since this realization. A sell-off was inevitable after the strong start to the year anyway, and the bull warned as much in a recent blog.

So far, the decline has not been too severe, as we expected. Volatility has also picked up and expect more of it. We will get through this period, a seasonally weak one, and emerge with new optimism and vigor. The economy is in good shape, jobs are plentiful, and wages are increasing. Stay steady my friends; all that is required is a little patience. After all, we have had good stock markets with higher rates than these!

The Lonely Bull