Monthly Market Report - June 2018

23rd May 2018

Being a journalist forces you to be fairly cynical about big trends, especially when it comes to investment, but I freely admit that I am a paid up member of the New Interest Normal brigade. It strikes me as just plain common sense that although interest rates will rise in the short term, probably back to around 3.5% in the US, they’ll average much lower rates over the long term i.e. the next few decades. My guess is that we’ll see an oscillation around 0 to 4% with 2% being a very rough long-term average, although in time weighted terms I think that average will probably be closer to 1%. Why am I so confident? Debt. There’s just too much of it sitting on peoples/corporates/governments balance sheets. We seem to have tripped into a default system which forces capital recycling at a global level via bonds. It’s an easy to trade, liquid system which allows great pools of excess capital to be moved around the planet with ease. The proviso, of course, is that the borrower pays back the money at some stage.

So, although it is obvious that the US Federal Reserve will win the prize for getting back to 3.5% first, it’ll probably by then be staring into a new slowdown and worries about financial Armageddon. At which point it’ll slam on the brakes and effect a handbrake reverse and start cutting rates – thus rescuing financial markets and especially bond investors.

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