Lend Me Your Ears

| May 22, 2023

If TINA is really dead, I shall not mourn her. Yes, she was the life of the party, and many people will miss her. Although I never expected the blowout to last for 14 years, we all need to sober up eventually. After all, not everyone was invited to the bacchanalia, and cleaning up will cost a lot and take a long time.

For those who may not follow these things closely, TINA is the acronym for there is no alternative. The invention by the Fed of quantitative easing (QE) during the Great Recession kept interest rates artificially low to boost asset prices. To abuse the metaphor, they also spiked the punchbowl by supporting asset owners through escalating purchases of bonds and mortgages. Few young people remember a time when interest rates were not stimulative. To be neutral, short-term rates should be somewhere around the rate of inflation. In taxable accounts, a neutral rate should be greater than inflation after deducting taxes. Instead of being neutral, short rates have been highly stimulative to the economy since the end of 2008. Attempts by the Fed to reduce its balance sheet (asset purchases) and return to the neutral rate have been abortive. Since high-quality bonds of short duration paid far less than inflation, there has been no alternative. That is no longer true thanks to the Fed.

Many people refuse to believe that TINA is dead. They posit that once the economy slows and inflation falls, interest rates will once again resurrect both her and asset prices. This is not a meritless argument. Supply chains are improving, and inflation is falling. Lower interest rates would reduce pressure on the federal deficit and America’s sky-high debt service. This is why we see so many people crowding into the growth companies that led the way during QE.

The problem is math. High prices relative to earnings require extremely low interest rates to make sense. If you cannot get paid on short-term safe investments, then future earnings are worth more today. Paying big premiums for growth companies can be justified under those circumstances. Investors in high-priced companies give nothing away when current rates are near zero. That is not the case today. There are many liquid alternatives that pay attractive rates of interest. Investors can turn to certificates of deposit, money market funds, and investment-grade bonds. Foreign companies are cheaper, pay good dividends, and are not subject to a devaluation of the dollar.

Unless the unexpected happens, I see the Fed keeping rates relatively higher for relatively longer. A cut in rates may not mean the return to near zero that many people are betting on. Instead, we may see the Fed move to the neutral rate. If inflation goes to 3%, short rates could go there or slightly lower. Longer rates are likely to remain somewhat higher than that. I expect a recession to happen but anticipate that it will be technical and seem like a slowdown. We might see a continuation of the sideways sputtering of the last few quarters.

Returning to a neutral rate will not justify a growth company redux. How much we pay for companies will matter. There are just too many high-quality alternatives available today, which is why I believe that TINA is dead. To paraphrase Marc Antony as imagined by Shakespeare, we “all did love [her] once, not without cause.”