[T286]The Best Interest Rates

Higher rates on the horizon mean many things.

It is bearish for
1. Bonds
2. Income stocks
3. Companies that borrow a great deal to
operate their businesses (profit margins will be
negatively impacted)
4. All assets with fixed income and rising
costs

It can be bullish for
1. Common stocks of growing companies (they
will get money formerly allocated to bonds)
2. Commodities that benefit from
inflationary psychology (when short term interest
rates rise slower than the rate of inflation, it
adds to inflationary psychology)
3. Companies and products that benefit from
higher inflation



INFLATIONARY PSYCHOLOGY IS A TRICKY THING

People often say that interest rate increases put
pressure on inflationary expectations. In our
opinion, this is only true if interest rate
increases are faster than inflation increases.
Currently, it is obvious that inflation is rising
faster than interest rates and as we allude to
above, this causes inflationary expectations to
grow.

Some other implications of higher rates:
1. Carry Trade-Some positive and some
negative influences: it is positive for
currencies with higher rates; it is negative for
the Japanese Yen, which has very low rates.
2. It is bad for speculators who borrow a
lot for their speculation; however it can be good
for long-term, conservative investors
3. Stock market valuations are a function of
earnings growth and interest rates. If earnings
growth remains constant, higher rates mean
slightly lower P/E ratios for stocks.
4. It is bad for private equity. Higher
rates make it harder for private equity firms to
take their companies public. Plus, tighter
credit makes it harder to borrow at the low
rates which make private equity more profitable.


SUGGESTIONS

Investors should sell bonds and income stocks
that have fixed yields. Hold cash in high
yielding well-managed currencies until rates peak,
which may take several years.

Higher interest rates in the U.S. can strengthen
the U.S. dollar in the short term; however, other
countries are raising their rates too. Therefore,
so we continue to favor higher yielding
currencies like the Australian dollar and British
pound.

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