Duration
“Every decade or so, people decide cyclicality is over. They think either the good times will roll on without end or the negative trends can’t be arrested.” —Howard Marks
Last week was a more eventful week than most. The Federal Reserve paused its rate hikes, as expected, but signaled that it may keep rates higher for longer, which caused the 10-year Treasury bond yield to hit its highest level since 2007. Congress failed to find compromise on a spending bill, increasing the odds of a federal government shutdown on October 1st. And the United Auto Workers (UAW) union continued, and expanded, its strike.
Stock markets didn’t like the above news, apparently, as the S&P 500 fell 2.9% and the Nasdaq fell 3.6% on the week.
What all of those news items have in common is that the duration of the changes will determine whether or not the short-term worries will lead to longer-term problems.
If Congress passes a bill next week, there will be no shutdown, and nothing to worry about. If it takes two months, then we might have some issues that trickle down into the economy.
If the auto companies and the UAW come to a compromise, production can continue as normal and there won’t be any major lasting effects other than a likely increase in car prices needed to offset additional labor costs.
“INTEREST RATES: It’s the duration of the tightening and its cumulative effect, not the level of the rates, that matters the most.” —Nassim Taleb
Interest rates are trickier. Until last year, we’ve had decades of declining rates and a decade and a half of loose money supporting the economy. But it takes a while for higher rates to flow through to the economy. And the longer we have higher rates, the more likely we’ll see even more things affected by those higher rates. The duration of higher rates matters, and the news that rates might be higher for longer seemed to be the thing that especially upset the markets last week.
Lately, the phrases “soft landing” and “no landing” have become popular in the media to describe where we’re heading in the economy, which is very reminiscent of what we saw from 2007 to early 2008 when those phrases were showing up regularly.
As those who have been reading this newsletter for a while might guess, we don’t think the macro economy can be predicted with the precision people like to claim when they go on television. But we think the cyclicality of markets and economies happens largely because of the human actors that participate in such markets.
And the best time to be ready for a change in a cycle is before it happens. Investing as if the good times can’t end, or that any downturn can be quickly corrected, can put one in a bad position if that turns out not to be true.
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