- If you are investing in bonds, if interest rates go up, the value of the bonds that you are holding is going to go down
- Pseudo-bonds, such as REITs, structured products based on borrowing, in large part have the same dynamics
- The stocks of solid companies have some form of PE expansion. Due to the rates, the fair PE, if we want to call it is much lower than in the past. Companies are valued based on their future cash flow discount to present. If the rates are low, they are worth more. But if rates go up…. their fair value is gonna drop by a large amount
- The majority of the growth companies’ cash flow is in the future and a lot of growth is embedded in them.
I was listening to a podcast and it provoked a conclusion that we might not have realized easily: Majority of us are now bullish on short-term interest rates.