Why Rates Will Go Higher

The caller yelled down the phone…

“WILL YOU ADMIT YOU GOT IT WRONG?!”

It was March last year and by the end of the call, I was wishing I sat on the fence and said nothing.

Here’s the mistake I made…

At the beginning of 2021, I started warning clients and subscribers that interest rates would go up much sooner than 2024.

The problem was, by March 2022, rates still hadn’t gone up and smoke was bellowing out of my phone.

Worse, the RBA and Federal Reserve gave every assurance rates wouldn’t head north for a few years.

Meanwhile, the bond market was flashing red, warning us inflation would scream and rates would rocket thanks to the rivers of stimuli pumped into the economy during the pandemic.

And then rates went up.

Incredibly, the bond market immediately fired another warning shot…rates could go as high as 3.5-4% by the end of 2023.

The markets retorted in disbelief, “…WHAT…NO WAY…BANKS WILL FOLD!”

Here’s the problem. Consumers and borrowers cannot expect inflation and rates to come down while governments (present and past, local and overseas) keep juicing their economy’s with higher spending.

My phone will blow up again for saying this but inflation will remian sticky while we…

…open the front door to mass immigration in the middle of a rental crisis

…export gas and then buy it back at a higher price

…make it unbelievably easy for people to sit on the couch and collect Job Keeper while employers are begging for workers.

Stuff like this is supply side inflation which higher rates won’t fix.

I’m not saying we can’t do these things. All I’m saying is we can’t have it both ways, higher spending and lower inflation.

BTW…if you’re wondering where inflation needs to be, the magic number is 2% (currently 7%).

Even 3% is too high because at that rate, our spending power halves every 13 years.

Meanwhile, some within the commentariat are warning us if rates go higher, we’ll hike ourselves straight into a recession.

I say, “BRING IT ON!”

A recession is the only way we’ll cool inflation and if that sounds harsh think of it this way…

Recessions are like a bad flu which last about three hundred days on average. Inflation is like cancer which can last for years if left untreated.

We are much better off with a nasty flu if it means avoiding an economic cancer.

Without a recession rates will go straight through 4% in a canter.

And if that happens, there will be lots more yelling.

Have a great weekend!

Adam

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