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Interest rates rise, asset prices fall, and cash is king again

05122018_Cash is king

Interest rates rise, asset prices fall, and cash is king again

In recent months, interest rates have been rising globally, exerting a downward gravitational pull on the value and price of most assets. It’s a trend that’s likely to play out for some time.  And that’s why it makes sense to be holding cash.


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Roger is the Founder and Chief Investment Officer of Montgomery Investment Management. Roger brings more than two decades of investment and financial market experience, knowledge and relationships to bear in his role as Chief Investment Officer. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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  1. Great article, thanks Roger. QT is happening at a slower rate ($50B per month) than QE was accumulating assets at it’s peak ($85B per month, $4.5T total accumulated assets at peak) and will take many years to reduce the Fed’s balance sheet back to ‘normal’ levels. Even so there seems to be a direct correlation between Quantitative tapering and Quantitative Tightening and lower prices and increasing volatility in asset markets, as you refer to in your article. Do you think the Fed will continue QT for years if it is seen to undermine the stability of markets through that entire period? From where I am sitting I can’t see the Fed getting even halfway done before the pain for markets, and ultimately the wider economy, gets too great.

  2. I wonder how long cash will be king for, we have just had the RBA say they could drop interest rates to Zero as well as pull the QE lever and flood us with cash, and now we have Janet Yellen saying “ there are gigantic holes in the system” and she’s worried about the corporate bond market and the feds ability to deal with a new crisis. These comments come roughly a year after she told us there would never be another financial crises in our lifetime.
    It sounds awfully like she is predicting one, and in which case proves QE NIRP ZIRP ect don’t work.
    And yet our very own pack of Keynesian asset bubble worshipers ( the RBA and co )want to do it all again here, now that the holy property bubble has burst.
    Funny that, I didn’t hear Glen Stevens saying those things after the sugar price collapsed due to corrupt world markets and subsidies etc, which has prompted our local realestate markets to drop by 50 plus percent. No eyelid was bat.
    This is the problem with centrally planned economies, winners and losers are chosen, efforts, productivity, and efficiency often get punished.
    This system is unsustainable and Janet Yellens own words are the evidence and proof.

      • Thanks Roger, that could be helpful, although I do suspect that those who grace the halls of power are fully aware of the situation but are also heavily invested in maintaining these asset bubbles both politically and privately, and a quick google search reveals how Scott Morrison is the property markets prime minister and has a long history of involvement in the sector as many of the political elites have. It’s a shame they obviously have not read the history on asset bubbles, that is they ALL burst.

  3. do you mind to elaborate this:

    “In other words, the world’s biggest buyer of bonds over the last ten years, has stopped buying and will begin to sell. And investors must understand that this is not a ‘cyclical’ change – a change that will revert back– it’s a ‘structural’ one.”


    my understanding is they will try to do this until something break down, like Lehman Brothers in 2008.

  4. Roger you have been calling this for some time and looks like you’re Day in the sun is here. As you and we all know when markets tank every thing goes down. So how will Montgomery’s funds will be affected? Really enjoy reading Montgomery team articles and podcasts.

    • Hi Robert, History shows that ‘quality’ tends to fall a little less and recover a lot faster. By way of example of the possible disparity, Telstra has fallen just 18% from its 1year highs while Kogan is off 68%, Afterpay (-43%) Wisetech (-31%), Xero (-29%), Altium (-30%) and Pushpay (-29%). Keep in mind we are wedded to ‘quality’ and we are also holding a larger amount of cash. The cash has certainly benefited investors in the last two months – the months during which the falls have hitherto been greatest.

  5. Roger, you mentioned in your book the risk of holding companies with high debt. Do you think this is contributing to the fall in Aristocrat Leisure (ALL)? The ROE is 37% but the ROC is only 16%, debt/equity is now 142%. With the risk of rises in interest rates, low debt companies seem to be holding up better recently.

    • Yes its always the case that lower debt companies exhibit less volatility however rather than looking at debt/equity, you must also look at the ability of a company to cover its interest obligations too. Finally its important to understand the purpose of the change in debt, in this case an acquisition, which in turn requires an understanding of and vote for managements ability to execute, incentivise and add value.

  6. I am keen to hear your thought on if this will translate to higher interest rates in Australia as well despite Australia housing price is falling, Labour’s negative gearing reform etc?

  7. Wow, that is scary stuff. What about the vast numbers of heavily indebted companies and individuals that have never experienced high interest rates or a recession. What about changing demographics,, the Central Government s still with ugly balance sheets? What about all that dumb money in ETFs? I could do “what abouts” all day. …. and when is the BS Santa Claus rally spin going to stop?

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