Investing / Investment Management
Out of context: Reply #12
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- monNom1
Something to be aware of is how the bond market affects the stock market. Bonds are a much larger market then stocks and movements in bonds will move the stock market around like a dog wagging its tail.
We have been in a lowering interest rate environment for almost 40 years, and we also had low to moderate inflation for most of that time. That environment has skewed the type of businesses that have been successful to those that thrive on cheap debt.
We might assume the successful businesses have been successful because of their innovation or their management or products. But without the environmental backdrop, they don't work anymore. A shark might rule the ocean, but take away the water and it's just a rotting corpse.
Tech is the most critical example, as it is particularly sensitive to interest rates. If we look at the market-cap weighted indices like the S&P 500, we see that the most successful companies in this environment have been the tech companies. 8 of the top 10 holdings in the S&P 500 are tech companies. All of the top 6 are tech. Tech accounts for 28% of the entire index. More than twice the next sector (health care).
And the rate environment is changing.
US official inflation is 7.9% now and some goods are more than double that. IE: Houses +19% in a year. Interest rates will be rising, and possibly rising fast to temper inflation. And that change in bond rates will tend to filter the types of companies that can be successful in the new environment. In a high rate environment, sectors like tech aren't likely to fair well. Any company who's stock price has been supported by debt-financed buy-backs is going to be underperforming vs past years as well. -- What's that you say? that's everything that has been driving the S&P over the past few years? Right... Expect carnage.
- So, what would your suggestion be? With $40k in S&P500 and $100k cash? Just hypotheticallyhardhat
- Banks will do well w higher rates. Look at BRK-B (Buffett) for nice diversification in one company. He's been killing it (again).formed
- I'm not really sold on the idea of tech will get effected by interest rates. Which one of the FAAMG has debt? They are all cash cows. On top of that tech hasBeeswax
- a lot better EBIT than traditional sectors. I hear others sharing your view but I dont understand. Sure FB, GOOG ad revenues can get slashed but in an envirnmntBeeswax
- where every company is suffering they will still be on top of the market.Beeswax
- I’m sure there are other factors, but tech in particular has long time horizons for profitability. There’s billions invested in infrastructure with no revenuemonNom
- On the assumption that if you can build the platform and user base over many years, that makes it very difficult for competitors to challenge you.monNom
- When inflation is 2% it takes 35 years to lose half your purchasing power. At 8% it is 9 years. That would tend to steer money towards more immediate profits.monNom
- Rather than the ‘get big fast, then figure out how to make money’ approach we see in tech these past years.monNom
- @hardhat. That’s a very good question. Passive investment in index funds has been a very successful, zero mental effort approach these past years.monNom
- What I’m suggesting is that era might be coming to an end. Stocks may be a poor investment for the next decade, like they had been at times prior to the 80s.monNom
- Or it could be that a different kind of business will do well. You might look at history in North America with similar inflation.monNom
- Or you might look at other countries that live with higher inflation. What companies are succeeding there? Can you understand why and transfer that to US cos?monNom
- *edit that should be higher inflation and/or higher interest rates.monNom
- The thing is, cheap debt has propped up everything. The amount of credit-card debt available is directly related to the spread between bonds and card rates.monNom
- Narrow that spread and less people can access credit, which hamstrings spending, harming consumer goods companies already having a hard time passing on costsmonNom
- Supply/commodity/lab... shortages have made autos more expensive. Get rid of cheap financing and expect sales to plummet. Really everywhere you look is carnagemonNom
- Here’s some more technical discussion and opinion about tech/debt dynamics.
https://www.bloomber…monNom - I don’t fully understand it, but seems that it is outside investors taking debt to buy equity that makes tech sensitive. Like tech is a long duration bond.monNom
- The debt cycle continues. Debt cycle - a production of federal banking systems. We are fucked until we adopt bitcoin as the reserve currency.shapesalad
- Bitcoin doesn’t get rid of the concept of debt. It just makes it much more difficult to repay as bitcoin is deflationary by nature. Not great for progress, IMO.monNom
- Bitcoin is worse. People are buying pure speculation. It'll go to zero faster than anything if there's a real crash.formed
- What remains to be seen is how much of this inflation is "transitory". If it goes down substantively as the supply chain issues resolve, things willformed
- rocket back up. If it doesn't, who knows.formed