Jeremy Powell, Chair of the Federal Reserve (aka the Fed), the central bank of the United States, will be giving his interest rate decision in a few hours. It will be one of the most watched commentaries with financial market participants trying to assess whether this is the beginning of the end of interest rate hikes and eventual reduction in rates.
Recently the Fed raised its benchmark interest rate by 0.75%, the second hike of this magnitude in just two months. This move is part of the Fed’s strategy to combat inflation, which has reached record levels in the past year.
But what are the consequences of higher interest rates for the US economy and beyond?
In this blog post, we will explore some of the effects that interest rate changes have on various sectors and actors, such as consumers, businesses, government, and developing countries.
Consumers: Higher interest rates mean higher borrowing costs for consumers who want to buy a home, a car, or use credit cards. This can reduce their spending power and demand for goods and services. Higher interest rates also affect savings accounts, as they offer higher returns for savers who want to earn more on their deposits.
Businesses: Higher interest rates make it more expensive for businesses to borrow money to invest in new projects, expand production, or hire more workers. This can slow down economic growth and innovation. Higher interest rates also affect corporate profits, as they increase the cost of servicing existing debt and reduce future cash flows.
Government: Higher interest rates increase the cost of financing public debt, which is already at a high level in the US. According to one estimate, the total budget deficit from 2022 to 2031 will be $12.7 trillion . Higher interest rates also affect fiscal policy, as they limit the government’s ability to stimulate the economy through spending or tax cuts.
Developing countries: Higher interest rates in the US can have spillover effects on developing economies in several ways . First, they can reduce US demand for imports from these countries, which can hurt their export-led growth. Second, they can attract capital flows away from these countries, as investors seek higher returns in safer US assets. This can cause currency depreciation and financial instability in emerging markets. Third, they can increase borrowing costs for these countries that rely on external financing from international institutions or markets.
In conclusion, interest rate hikes in the US have significant impacts on various aspects of the economy both domestically and internationally. While higher interest rates are intended to curb inflation and maintain price stability, they also entail trade-offs and challenges for different sectors and actors.
Tesla CEO Elon Musk’s trust sold about $6.9 billion worth of stock in the company over the last week. Some of the shares were sold in part to satisfy tax obligations related to an exercise of stock options but he’s just cashing in on record stock price.
Despite falling 15% last week, Tesla shares are still up around 46% year to date following a record closing price of $1,229 the previous week.
I’ve been out of Tesla stock since Q3 so missed the recent run. I prefer the growth at a more reasonable price (GARP) approach to investing than the growth at a ludicrous price (pun intended) form of investing that Tesla and some of the recent high-flyers have become.
I still remember buying Tesla shares for the first time at around $40 per share back in 2016 and God I wish I had just held on or forgotten about em… what most people don’t realize is that Tesla shares were a ‘dog’ not moving much and only post-pandemic have the shares skyrocketed and gone up 10x or 1,000%!
As https://www.bing.com/search?q=warren+buffett&cvid=92f52ed28ecc437ba17b7df32c0e1bdf&aqs=edge.0.0l9.11732j0j1&pglt=2083&FORM=ANNTA1&PC=U531# takes centre stage this afternoon at 4 pm EST (9 pm BST) to host the Berkshire Hathaway Annual General Meeting, I’m looking forward to hearing his perspective on the coronavirus pandemic and implication for investors. Buffett has been surprisingly quiet over the past few months as the U.S. markets crashed and rebounded almost as swiftly.
It’s now confirmed, Buffett wasn’t getting ‘greedy‘ or going on a stock-buying spree in the last quarter. As the stock markets sold off, Buffett continued to build up his massive cash pile to a record $137 billion, up almost $10 billion from the end of the year. According to company filings, Berkshire only bought $1.8 billion of stocks on a net basis in the period and repurchased just $1.7 billion of its own stock. He moved more money into U.S. T-bills which also indicates he’s not looking at deploying that cash into equities in the immediate future.
Berkshire’s did also report it’s biggest ever first-quarter loss of $49.7 billion primarily resulting from $55.5 billion in unrealized losses from its stock portfolio it had to report. On an operating level, the business was profitable by about $6 billion and as the company stated in its press release: “The amount of investment gains [and] losses in any given quarter is usually meaningless and delivers figures for net earnings per share that can be extremely misleading to investors who have little or no knowledge of accounting rules.”
So let’s hear what the ‘Oracle of Omaha’ has to say later today. It may not be as entertaining without Buffett’s right-hand man c being present but insightful nevertheless. I’ll update the article post-event with further insights and you can watch the meeting (more of an interview) live at https://finance.yahoo.com/brklivestream/
Global stock markets and in particular the S&P 500 index had once of the largest sell-offs in history as highlighted by the chart above. Only during the 1987 stock market crash ‘Black Monday’ did we have a steeper sell-off with the market falling on average 2.5% per day.
‘While the market is working well for most of its consumers, the package we’ve announced today should make it less expensive and time-consuming for investors to shop around and move to the platform that best meets their needs. As part of that, we believe it is right that we restrict exit fees, so people can move their money freely.’
The FCA found that while competition is generally working well, some consumers and financial advisers can find it difficult to shop around and switch to a platform that better meets their needs. Consumers can find it difficult to switch due to the time, complexity and cost involved – driven in part by the exit charges they incur and difficulties switching between unit classes.
To address the issues uncovered, the FCA is consulting on rules to allow consumers to switch platforms and remain in the same fund without having to sell their investments, and is proposing to ban or cap exit fees.
The proposed restriction on exit fees would apply to platforms, and also firms offering a comparable service to retail clients. The FCA is seeking views from the wider market about how a restriction could work, before consulting on any final rules.
The FCA has welcomed the progress industry is making to improve the switching process, most recently through their STAR(link is external) initiative to improve the efficiency of the transfer process across the retail investment and pensions sectors. The FCA is encouraging firms not already involved in this initiative to consider taking part as a way of improving the switching process and achieving better outcomes for consumers.
The FCA will review progress made by the industry to improve the switching process later this year, and again in 2020, if needed. The FCA will consider taking forward further regulatory action if the efficiency of the switching process does not improve.
Since publishing its interim report, the FCA has seen firms and the industry acting to improve the provision of information about costs and charges, helping consumers shop around. As a result, the FCA is not proposing new rules but will review the progress of industry in 2020/21, and consider if further action is necessary.
The EBA has analysed the data provided to it for the year 2017, and compared it to the 2016 data. The main results of this analysis are as follows: – the number of high earners who have been awarded EUR 1 million or more in annual remuneration slightly increased for 2017, from 4 597 in 2016 to 4 859 in 2017 (+5.69%).
The exchange rate between EUR and GBP continue to have an effect on the number of high earners, leading to a slight increase in the staff income paid in GBP when expressed in EUR. – Around 87% of high earners were staff whose professional activities have a material impact on the institution’s risk profile “identified staff” in 2017 compared with 89% in 2016.
Although a small decrease, this confirms that the percentage increased significantly after the regulatory technical standards (RTS) on identified staff entered into force in 2014. Nevertheless, not all high earners are considered identified staff.
The EBA will continue to benchmark remuneration trends (for the performance years 2018) in the first quarter of 2020 and will continue to publish data on high earners annually in order to closely monitor and evaluate developments in this area.
More than 3,500 bankers in the UK are paid more than €1m (£850,000) a year, according to pay and bonus details published by the European Banking Authority.
History is made today with Apple Inc. becoming the first technology company in the world to reach a trillion dollar market value. Although it’s not the first company as some media outlets are reporting as PetroChina briefly hit a trillion dollar market cap in 2007 before the credit crisis.
Nevertheless, I’m ecstatic and happy for Apple. Both as a customer and shareholder that has been able to be part of their amazing journey over the past eight years.
Apple share price has risen 20x (2,000%) from the 2008 lows when it was trading near $10 a share. Today it hit $208 a share!
Here’s a great graph my BBC on Apple’s journey to a trillion dollars:
Lesson: Saving won’t make you rich. Neither will speculating or short-term trading will. Unless it’s your full-time job and even then it’s not as easy as it looks. Be prepared to lose your shirt.
What will make you really rich is supporting and investing in passionate people with great ideas. The “crazies” that are trying to disrupt business models and building real products and solutions that will make our lives better.
Find as many of those crazies as you possibly can. Invest in them early but in small amounts. One of those crazy persons will make it and deliver the 2,000 – 10,000% return making you rich and part of something bigger than yourself. The journey will be just as fun as the destination.
This is not investment or personal financial advice. Informational purposes only. It’s common sense which unfortunately isn’t as common as you’d think. Invest in yourself and learn as much as possible about investing and personal finance. Get a good financial adviser. If you don’t have one or not happy with the one you do have, put in a request at http://www.Advisory.Direct and we’ll help you find one you can trust. (Yes, a shameless plug for our company. But we really do help.)
Listen to my quick 5-minute podcast about Apple’s historic milestone:
Invest in yourself, subscribe to the Dinsider podcast for short and sweet bursts of insights on digital technology, blockchain and emerging decentralised economy: Apple iTunes, Google Podcasts or Spotify.
I wrote last week about crypto coins or so-called cryptocurrencies. Read here if you missed it and stated:
“Unfortunately, most people are treating crypto coins as poker chips and the crypto-coin market as a casino. Which it has become to a large degree. It is a bubble which could get a lot bigger before it either pops (devastation) or deflates in relatively non-destructive manner. We would be lucky if the latter occurred and if you were fortunate (or unfortunate) to have lived through the dot-com bubble from 1996 – 2000, will indeed see the similarities.”
Now the chatter and media noise around the mother of all crypto coins, bitcoin has become deafening. Wallstreet has joined the fray with the first bitcoin futures contracts trading this morning in Chicago.
What are futures?
Futures are a way to profit from short-term price movements, both up and down, in an asset without actually owning the underlying asset. A futures contract is a derivative product that gives you the right to buy a certain commodity or financial instrument (like bitcoin) at a later date, for the agreed price now on the condition, you agree to keep that promise and take delivery of the asset in the ‘future.’
A fun way to learn about futures and how you could make a ‘killing’ or ‘lose your shirt,’ consider watching the movie Trading Places. One of my favourite movies, Trading starring Eddie Murphy and Dan Akroyd puts the futures market at the centre of the plot. It tells the story of an upper-class futures commodities broker and a homeless street hustler who unknowingly are made part of an elaborate bet by the owners of a futures trading firm. Essentially they swap their places to see if anyone can be taught to trade. The storyline is a modern take on Mark Twain’s classic 19th-century novel The Prince and the Pauper.
Not to digress. In the case of bitcoin futures, one contract size is equivalent to 5 bitcoins with a notional value of around $80,000 based on today’s bitcoin price. So you would buy a futures contract expiring either on the last day of the month in January, February, or March. The futures have already jumped higher and triggered circuit breakers in overnight trading.
Futures are not the way to purchase bitcoin for individual investors and unless you’re a professional speculator, trader or using it as a hedging mechanism against your millions of dollars in bitcoin, avoid futures like the plague!
If you want to own bitcoin, have a conviction or thesis on why you believe it’s fair value is not being reflected in its current market price. Be an investor. An owner. Purchase the asset with cash (risk capital) and sell when you believe the asset has reached fair value. There are many relatively safe exchanges to buy bitcoin and other currencies as well as Coinbase, perhaps the best retail platform to buy small amounts of crypto coins.
With the market capitalisation of all crypto coins above $400 billion. I’m not expecting the excitement and speculation to abate anytime soon. I’m not buying any bitcoin at these prices. I believe there is relatively better value in other crypto coins that are worthy of consideration as an investment.
This article is for information purposes only and does not constitute investment or financial advice. The views and opinions are my own and not necessarily those of my partners, associates, or affiliates.
Suhail Ahmad has over 20 years of experience in financial services and technology working in Canada, U.K. and the Middle East. He is a trusted adviser on business growth, innovation, and value creation in a digital economy. For more information, email [email protected]
The forum will be held throughout the week, starting today Monday 9th to Friday 13th at the IoD headquarters in Charlotte Square, Edinburgh. All sessions are free to attend but registration is recommended as seating may be limited.
I have the honour of speaking on Thursday afternoon at 3:30 pm, discussing not only my experiences in Canada but also the enormous opportunities for Scottish companies to reach the emerging Islamic markets in the Middle East and Asia.
Coincidentally, Edinburgh hosted the Global Ethical Finance Forum last month which I had an opportunity to attend and explore opportunities for collaboration with businesses and investors from the region.
I’ve shared my article below for your reference and encourage you not to miss a great opportunity at the Scottish International Week to learn from, connect to, and network with Scotland’s global leaders.
Islamic finance takes centre stage in Scotland
This article was first published in Islamic Finance news Volume 14 Issue 39 dated the 27th September 2017.
Over 300 business and finance leaders gathered in Edinburgh to attend the 2nd Global Ethical Finance Forum (GEFF) on the 13th and 14th September at the RBS Conference Center. The theme of the event was ‘Merging profit with purpose’.
Kirsty Britz, the director of sustainability at the Royal Bank of Scotland, opened the forum with a welcoming address that would set the stage for the two-day conference. “We must encourage ethical choices as a norm rather than the exception.” Key speakers at the GEFF this year included Keith Brown, the cabinet secretary for economy, jobs and fair work in the Scottish government; Nurlan Kussainov, CEO of Astana International Financial Center (AIFC) Authority; Jameel Ahmad, the deputy governor of the State Bank of Pakistan, and many more.
During the various panel sessions and keynote speeches, the forum covered the interplay between ethics, faith and finance. There were discussions on impact investing, sustainable development and green bonds, as well as an innovation showcase near the end of the forum which highlighted the latest innovative tools in ethical finance. Discussions on socially responsible and impact investing brought out the challenges facing asset managers with Anthony Hobley, CEO at Carbon Tracker, stressing: “We need to see a paradigm shift whereby ESG [environmental, social and governance] reporting becomes the norm and is just an integral part of any financial decision. For that to happen, it needs to be seen as critical to the management of financial risk and [to] achieve better returns.
This goes to the Holy Grail at Carbon Tracker, how does one translate the environment, climate energy and transition risk into quantitative financial risk and opportunity? To achieve this, ESG needs to be much more forward-looking than backwards-looking. It must be capable of stress-testing business models against foreseeable risks and transitions and capable of flagging the collapse in valuation we have already seen in US coal European energy utilities.”
As an example, green bonds came into prominence in 2007 when they were launched by a few development banks including the World Bank. Ten years later, the tax-exempt bonds continue to be suited to long-term projects. Preliminary estimates for green bond issuance in 2017 by HSBC, Moody’s Investors Service and Climate Bonds Initiative are all in excess of US$100 billion and demonstrate the massive opportunity for the ‘ethical’ bond sector. A green Sukuk facility, a Shariah-compliant version of the green bond, can provide much-needed investment in renewable energy and other environmental projects to finance regional development projects in the Middle East.
Discussing the inherent issues facing the financial services sector, Kussainov addressed the underlying challenges facing the industry. “Within the current business model in the financial services sector, speculation and arbitration are always based on asymmetric information. People from low-income groups who have less access to the information end up suffering more.
With the financial services sector rapidly embracing technology, there is a strong belief that in the near future there will be a reduction in the current communication gap that the sector presently faces. This will bring a very positive impact on to the development of Islamic and ethical finance across the world, helping it to realize its global value proposition.” David Parker, the executive director of Financial Services at the Bahrain Economic Development Board (ECDB) who also attended the forum, was confident the relationship between Islamic and ethical finance will become stronger. “We (ECDB) have been trying to develop [the] Islamic fi nance initiative around innovation and fintech, trying to ensure the industry is fi t for purpose in the 21st century. Islamic finance (will become) an important part of the wider ethical finance agenda.”
The forum closed on an inspiring note with an optimistic outlook by Nigel Kershaw, the chair of the Big Issue, highlighting that the democratization of finance will lead to the wider adoption of ethical finance as an integral part of investing, saying: “There is a lot of talk about ethical finance and in particular ESG and social impact because it’s talked about primarily by people involved in the financial sector. I believe the democratization of capital is extremely central to what we do. Quite often, the discussion is top-down supply and product-led and for me, it often misses one of the most important social outcomes that is quite often forgotten, that is the opportunity for ordinary people to invest and save in creating a better place to live for themselves, their families and the community around them. It’s not about mainstreaming ethical finance; it’s all about bringing the mainstream to us.”
The GEFF plays an instrumental role in connecting thought leaders and stakeholders from the responsible and Islamic finance world to learn, collaborate, and work toward a mutually inclusive desire to develop finance as a force for good.
Waiting for my youngest son (above) to participate in his first nativity play yesterday afternoon, I tried not to look at my Bloomberg app. Or think of the roller-coaster the financial markets could embark on if we were to get a surprise from the U.S. Federal Reserve later in the day.
When my son arrived in the gym hall, I could see his excitement with dad in the front row. I arrived early just to make sure I’d get a good seat (and parking). As the older kids and teachers started their introductions, etc. I could see my son’s excitement start to wane as he sat with his classmates waiting for the show to begin.
Bump up not lift-off
Just like the millions of professional investors who literally were sitting on their hands for most the day waiting for Janet Yellen and the Federal Open Market committee at the same time. Providing us their interest rate decision so we can move on with our day. Which makes me wonder, why they don’t hold the conference first thing in the morning and help reduce the anxiety on trading floors worldwide!? One of many humble suggestions I can give to central bankers if I were to get in a room with them.
So now we finally have the much-anticipated interest rate hike in the U.S. It’s not a major move. However it’s the potential of it becoming the beginning of the end of low-interest rate environment that has some economists and “fed watchers” all excited.
But what does it mean for most investors and business managers? Based on my crystal ball and the Economist in me (yes, I do have a degree in Economics), I don’t think we’re going to be out of the low-interest rate environment anytime soon. The U.S. economy is not healthy enough to be able to sustain series of interest rate rises based on the data I’ve seen. Sure the U.S. jobless rate is the lowest it’s bee in seven years. We’ve seen relatively good performance out of the U.S. economy over the past few years. But the U.S. is not immune to the global economic slowdown and will have to tread very carefully to avoid falling into a recession.
But it doesn’t matter what I or you think about interest rates. It is what it is. It will be what it will be. Many investors and business managers spend too much time trying to figure out what will happen. And often times what ends up happening is what we least expected. We simply need to understand the possible scenarios, what impact these scenarios will have on our assets or earnings, and take steps to mitigate the impact of these potential scenarios. Or preferably how to benefit and improve the financial position under these various scenarios. Difficult but not impossible.
What it means to you?
As an equity investor I don’t see any significant impact from the interest rate hike on my portfolio. Since most of my companies have low debt and I’m defensively positioned. However if interest rates do start to increase steadily over the next year, the already fully valued equity markets in the U.S. could see major price declines.
For the struggling pensioners and savers relying on interest income, it’s too early to start rejoicing. The quarter basis point increase or 0.25% is nothing to cheer about just yet. Over the past almost decade savers have been punished with huge transfer of wealth from savers to debtors by means of a low-interest rate. They will not see improvement in their miserable investment income anytime soon.
Business managers need to become more prudent with their accounts receivable to ensure they get paid timely and proactively monitor their clients financial positions. Bad debt is often a silent killer on balance sheets.
Key is to seriously consider what are the implications of a series of interest rate hikes next year. That would significantly increase the cost of borrowing despite interest rates still being near historical lows.
As a business manager you need to be conscious of potential change in interest rate environment and the economic instability or recession it could trigger. Be extremely careful taking on debt and on the other hand if requiring financing to do it sooner rather than later.
An interesting fact is that credit markets have been tightening well before yesterday’s interest rate increase. Goldman Sachs tracks a financial conditions index which measures and incorporate factors such as stock prices, credit spreads, interest rates, and the exchange rates to determine the impact of the interest rate movements.
According to Goldman Sachs estimate, it says that every 1% rise in the federal funds rate shows up as 1.5% increase in the index. The index sits at the highest level it’s been in five years since September of this year. Borrowing costs for business could increase dramatically over the next few years if interest rates continue to rise.
Get ready for a quite a show
But at least the December interest rate hike is done and dusted. Investors are in for quite a show as market participants (primarily economists) will continue their obsessive discussions of how much and when interest rates will rise next year.
Smart equity investors will ignore them and carefully look at valuations and rotate out of momentum and high-beta shares in favour of value and distressed equity. Speaking of distressed equity, energy shares which have taken brunt of the tax-loss selling may finally stabilize. Successful investing over the long-term is always about quality assets and cash flow.
I don’t know if the Santa Claus rally will transpire over next few weeks. But either way Mr. Market can now get the show on the road.
Happy holidays everyone!
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