Submitted by Taps Coogan on the 10th of October 2018 to The Sounding Line.
With market participants increasingly anxious about rising interest rates and tightening global liquidity, Rick Santelli is hear to remind us that the problem is not rising interest rates per say, but the behavior that a decade of abnormally low interest rates encouraged. So long a crisis can be avoided, the pain of rising rates should be embraced.
“Higher rates are getting to be the antagonist of the marketplace, kinda the Joe Walsh of the economy. Higher rates are the bad-boy. But really they’re not. What is going is not only something that is unexpected, we should welcome it. The notion of manipulating and managing rates for the better part of a decade and then thinking that higher rates is anything but welcome is just crazy. Now granted, you need the right environment to have the rates move up without doing damage and my guess is that’s why central bankers took so long to get to where we are at today. And to be quite frank, so far so good. Now, the US Fed is much ahead of all the other central banks and their cumulative balance sheets are just starting to tip into the contraction period after resting above $16 trillion for a while. But borrowing costs going up is not the bad guy. The bad guy here is the notion of all the behavior that was created and all the corporate and capital structures that were created during the artificially low interest rate period and that adjustment (has) got to occur. Whether it’s carry trades. Whether it’s servicing debt. Whether it’s just the basic decision that’s now going to have to go on between borrowing costs one hand and higher rates of return on the other. Think about it from the big offices. What’s the optimal capital structure going to be now? Are we going to issue more debt or are we going to start issuing equities? Is the age of buy-backs going to slowly wind down? These are all very important things, but to understand them we have to really think… globally we are tightly tightly packed and the deleveraging process is never smooth. It usually goes in fits and starts… So ultimately, how will investors deal with this and can it bring even better times? I can’t tell you that but what I can tell you is the period of less than a week of turbulence in equities seems to be running its course and interest rates, though elevated, are well behaved. If this process can continue, I think investors can find a safe place between deleveraging and complete market avoidance.”
Enjoy the full speech above.
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