Interest Rate Cuts
Hi Folks, so here is a deep dive on the current rate cuts:
1. When FEDs cut the IR, it is an indication that they are trying to accelerate the economy. By increasing the liquidity in the markets.
2. This has multiple impact/fine-reads within the economy:
a. The economy seems to be slowing down. Why? because the last rally (post COVID) seems to have mostly come from debt fuelled spending. Government borrowed money, and spent. This jumpstarted the economy.
b. Now, we are at the end of this cycle: someone needs to spend
c. Government are trying to push "easy borrowing" (lending space) and accelerate growth by cutting IR
3.The nature of the market therefore hasn't changed. We are still in a liquidity driven rally.
4. Good part: the stock markets/investments are likely to behave in a similar way the way they have done in the last 3 years.
5. That is: these will go up. But, with a lot of volatility.
6. Therefore, for our community: it is critical we (a) stay invested (b) buy new stuff at discounts (by using our cash positions that we have built)
7.By cutting the IR fast in this cycle: (the expectation was that IR would get cut by 0.25, but it got cut by 0.5), the US government is indicating that they are worried about growth. And, they want to accelerate this fast.
8.The above games: fundamentally weakens the economy long-term. And, this will burst one way or the other.
9.When I was a naive, I used to think: "ohh, bad economy means, bad for everyone". This is far from truth: bad is also layered: what might be bad for the overall economy, might be great for many crony billionaires.
10.So comes the golden questions: when will the economy slide? how exactly? and who precisely will suffer?
I have a thesis: and I could be off (but here is what I think)
- There is no end of USD. US will successfully export inflation to the world. There is no currency right now which can replace the USD. This can be checked by looking up the fraction of world trade in USD.
- Therefore, we will witness a cost of living crisis (we are already witnessing)
- But the frequency of this crisis will be high (meaning: that inflation might up 7-8% each year for 2-3 years, then it will die down) (then again this cycle starts). This cycle will be much faster
- People will keep on waiting for the asset prices to correct too much before they buy (I am already seeing this chatter quite a bit)
But, the surprise for people would be: that asset prices keeps going up. They keep paying higher and higher for inflation (due to this fake growth).
11. In simple words:
- Assets (stocks, real estate, etc) would appreciate like 10-15% a year
- Inflation in countries like India (de-facto) will be 9-10%/year for people investing
- People who invest will see a real growth of 2-3% on their wealth
- People who don't invest will suffer the most due to cost of living crisis
- In India: most people will move from "savings" to "EMIs". And, will keep on wondering where their money is going
- People who have the option of going to different zones: eg. low cost of living zone, low taxation zone, high wealth growth zone etc would benefit the most.
I might look like a mad person ranting.
But, this is a thesis I am quite confident about.
Yesterday, I had released a video: on that I had explained how to growth your wealth at 15% CAGR. It is critical to do that (in fact, it is very much doable). So do watch it, it explains some of these points.
If you guys want, I will make a video on this post as well. And, explain some more fine prints.
