Money Signals A Return To Normalcy

by: Dana Blankenhorn

Rising interest rates mean money markets are finally unstuck.

Banking works again. Technology stocks, not so much.

We could be looking at a re-run of the 1960s, in a good way.

There is much boo-hooing over the recent rise in interest rates. It is causing enormous volatility in the stock market. Retailing and technology issues that worked well a year ago are no longer working well. Banks are working well, but anyone holding paper bought at near-zero rates are looking at large and growing losses.

This is good news disguised as bad news. It represents a return to normalcy, as old Warren G. Harding might have said. It means that the capitalist strike, the refusal to invest that began with the freeze-up of markets in 2008, is now decisively broken.

People want money now. They want dollars, they want euros, and they are willing to pay to rent them. They no longer have to be thrown from helicopters. Bankers can still buy cash cheaply, but they can also sell it dearly, which means central banks can start charging for it, too, raising their yield spreads. Savers can start getting a return again without having their eyes glued to the TV like day traders.

This is the way the economy is supposed to work. This is the way the economy actually works in normal times. We are finally returning to normal times.

Obviously, there are losers when this happens. Real estate is a loser. Many stocks are going to be losers. But there are also enormous opportunities here. The great stock market of the 1960s came alongside steadily rising interest rates. It's not necessarily a bad thing, especially if regulators stand ready to use the considerable weapons at their disposal to fight inflation when it occurs and keep the money markets on an even keel.

Money markets. We're going to have money markets again.

The roll-over in technology stocks like Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG) (NASDAQ:GOOGL) and Microsoft (NASDAQ:MSFT) as their cash hoards fell in value was the canary in the coal mine for all this. But all it really means, for them and for other big cash positions, is an opportunity to make some serious coin on assets. Chief financial officers should be doing the happy dance.

While some will panic and start predicting hyper-inflation around the next corner, this is actually very good news. Goldman Sachs (NYSE:GS), with $87 billion in cash and equivalents on its books as of the end of March, suddenly looks dirt cheap at a market cap of $90.6 billion. So do other big banks like Bank of America (NYSE:BAC), which can get a price for their cash again. It's likely that so can the companies which buy and use that cash.

Yes, there can be too much of this good thing. But one point I continue to make, no matter how often it's ignored, is that technology is naturally deflationary. And technological change is constantly accelerating as the steadily-rising computing power made possible by Moore's Law is put to work. It's an economic force that is certain to continue keeping inflation in check.

As we adjust portfolios to a normal environment, it's likely there will be bumps in the road, maybe even recessions here and there. But beyond that I think we're looking at the best economic decade since the 1960s.

Disclosure: The author is long GOOGL, AAPL. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.