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Back To The Future

Terence Reilly profile picture
Terence Reilly

It has been our central operating thesis since the Great Financial Crisis that low interest rates + low volatility + larger central bank balance sheets would = higher asset prices. We are now entering an environment where we are seeing higher interest rates + higher volatility + smaller central bank balance sheets. We surmise that will = lower asset prices. It's just math.

The big news this week was probably Trump's trade policies and tariffs on steel. On that subject we do not believe that those tariffs will see the light of day. He will lose when he goes to the WTO and will be forced to retract them but, then again, we think that his threatened imposition of tariffs is probably only a negotiation tactic.

We had several discussions this week on tariffs with people we respect. They made several interesting points about trade and steel and tariffs. My contention is that none of that matters. Wall Street and investors see tariffs and they think trade war. They think trade war then they think about the Great Depression and Smoot Hawley with a shooting war to follow. When it comes to trade wars investors will shoot first and ask questions later. A trade war = lower asset prices.

This week we saw the new Fed Chair go in front of Congress and act hawkish on inflation. Markets reacted negatively. The very next day he seemed to walk back his earlier comments. This is precisely why, as investors, that we need to prepare for inflation. No one wants to fight it. It is not politically acceptable until it is too late. No Fed chair will have the political will to fight inflation until it is raging and it begins to hurt Main Street. The biggest beneficiaries of inflation are the largest debt holders. Who are the largest debt holders? Governments. They need

This article was written by

Terence Reilly profile picture
Former Member of the NYSE, currently a Registered Investment Advisor, concentrating on developing long term investing portfolios for High Net Worth investors and families.

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Comments (1)

jprizzuto profile picture
low interest rates + low volatility + larger central bank balance sheets would = higher asset prices.

more then math...

higher interest rates + higher volatility + smaller central bank balance sheets + low unemployment + stronger economic growth + higher earnings growth... still equals higher asset prices.
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