Raising Rates: A Discussion

[juangomez053]

Rate hikes will raise the cost of borrowing money. That means stocks that are still in their growing phases will most likely grow at a lesser rate (example: some of ARK’s holdings). Not only this, but companies that have and rely on substantial amounts of debt, this includes some large caps, will take a hit sometime in the future. Valuations will be scrutinized because of this. How much are people willing to pay for future earnings? How will future earnings be impacted in the first place? Credit companies that rely on interest payments from consumers that don’t make their payments on time will also likely take a hit. Interest rates were low before so consumers didn’t mind spending more than they could afford and paying it off later, now not so much.

Liquidity will be reduced from the market. Margin debt was very high recently, not surprising due to the low rates and WSB boys yoloing tsla fd’s on full margin on Robinhood. Once rates are hiked, margin debt will be substantially decreased due to higher borrowing costs.

Here you can see margin debt relative to historical index performance, with margin debts at all time highs usually leading to bear markets.

Here you can read about updated margin debt numbers.

Tapering, a way to raise rates, will also happen soon. Bond purchasing will be tapered, rising the coupon rates of bonds. This will take some more liquidity out of the markets from organizations like pension funds that need to keep up with payments and rising inflation, but couldn’t stick their money in bonds due to the low rates. I don’t think a couple rate hikes and bond tapering will fix macro conditions by themselves. Labor markets are shrinking, supply chains are still struggling because of this, inflation is nearing/at 30-year highs. I think it’ll take a lot more than what we’re expecting from the fed to fix the impact macro took from COVID.

What can you do? Hedging is an option. You can scale into longterm QQQ puts (tech will be one of the most affected from rising rates) on rally days. Scale into positions in solid companies with pricing power when it comes to high inflation, some examples would be consumer defensive stocks like PG or energy stocks like XOM or even in solid mega-caps like MSFT. Start looking at opportunities in the banks. Rising rates will help their bottom line due to higher borrowing costs. You can read more about that here. You can also look for value in international markets like Japan, for example.

I don’t think the volatility will be over after today, or after Q1 for that matter. Here are some examples of popular tech stocks and what could happen if they correct to trend:

MSFT:

NVDA:

AAPL:

AMD:

TSLA:

INTC:

Scalping is my way to go, but for those looking to invest for the future, you might want to rethink before buying the dip on growth stocks until you can see their earnings and can see what direction the market wants after Q1 when rate hikes will start coming. This isn’t meant as FUD, this is meant to keep the conversation honest and present both sides of the coin.

Good luck!!!

[macromicrodick]

hey, Juan. awesome thread! always learning so much from your posts. just wondering your thoughts on some things (i feel like i’m talking to JPow lol):

1. you talked about margin on trading accounts. i’ve read various opinions that the boom in crypto trading also lead to a lot of margin trading in crypto. do you think a raise in rates is going to have a chilling effect on crypto?

2. it seems like today’s FOMC is that their main support in raising rates is that the labour market is showing strength. is there a correlation between raising rates and unemploymet? or is the Fed saying that since job growth is strong, there’s more wiggle-room to raise rates without effect unemployment? seems like maximizing employment is a focal point for the Fed.

3. Hoss touched on this on TF but his opinion (to my understanding) is that the Fed would raise rates gradually and that any effect on Big Tech would have a lag effect since many of these companies balance sheets are healthy. do the FAANG stocks fit this criteria because you mentioned MSFT?

4. Since rates are going up, do you think we’ll see a lot of M&A activity? since it’s cheaper right now to borrow/finance even though valuations are still historically high?

[juangomez053]

1. Yes. A lot of speculative markets will be affected when rates are raised due to the decreased liquidity. Not only that, but crypto regulation will come, I believe, by year-end. Congress is already starting to try to pass some amount of regulation on crypto hidden in the America COMPETES Act, which can be read here. Scroll down to page 1483 and start on line 15.

2. Yes, there is a correlation between rates and unemployment. The lowering of rates, and easing of monetary policy in general, is meant to stimulate the economy. Along with that stimulation comes an increase in consumer spending. Given the increased demand from consumers, companies can now expand at a faster rate (not to mention low interest rates also help with this rapid growth, too). Along with this expansion should come an increase and strengthening in the labor market. Higher supply is needed to meet higher demand. The problem now is the shrinking number of people willing and able to work, whether it be because of the pandemic or any other reason, is causing higher inflation.

3. Yes, except for Netflix. Their moat is decreasing and competitors are catching up to the lead. The others, however, are relatively stable, although you could make an argument that valuations are still a bit skewed.

4. We’ve already been seeing a lot of M&A activity but I’d be very surprised to see that this level of activity is sustained going into the next few years.

[juangomez053]

Just a quick FYI because I forgot to include it in the post. I said look at opportunities in the banks, but this highly depends on how steep/flat the yield curve is. If you don’t understand what a steep yield curve is or what the yield curve is in the first place, just let me know and I can gladly make a forum post on it.