Focused Investing Perspectives #40

During the last full moon.

Looking toward double-digit long interest rates.

Perspectives This Week

The markets took little this week from the US Inauguration or the mass waves of pardons on both sides of it. Over the week the S&P 500 and broad real estate index (VNQ) were up less than 2%.

Crude oil dropped in price nearly 3% and broad energy (XLE) did too. That size move is just a normal week at the office for oil, so no big deal.

The S&P 500 floats along near its all time high, with a PE ratio higher than where it has peaked at all market highs over the past 90 years save for the late 1990s. But the youngsters see no problem here, because according to them the world has changed.

Deflationary forces are said to be so strong that they will pull interest rates down no matter what. Earnings multiples will rise in response, and all rate-sensitive investments will turn to gold.

I’m not dumb enough to say this is impossible, but I am smart enough, and aware of enough history, to view it as unlikely. Interest rates are the price of time, and in a balanced market real rates will not be zero.

Perhaps President Trump will try to channel President Erdogan of Turkey and decide that that path to lower inflation is lower interest rates. The Economist recounted in mid-2023 how well that had worked:

In 2021, facing inflationary pressure that caused central banks everywhere to raise interest rates, Turkey cut them. Believing that low rates lower inflation—the opposite of economic orthodoxy—Mr Erdogan has repeatedly strong-armed Turkey’s central bank to slash its policy rate. Indeed, the overnight policy rate now stands at a cool 8.5%. According to official figures, annual inflation hit 86% in 2022,

And of course Erdogan’s lackeys insist he was right, as inflation has dropped from near a 90% rate to near 50%. Never mind that it was below 20% before this nonsense began:

In the US, managing this would require that President Trump wrest control of the Fed from the bankers and economists. Again, neither impossible nor likely.

But there is an aftermath in Turkey and would be here. In Turkey eventually, with the recent resurgence of inflation in Turkey, interest rates have finally surged.

There are benefits for Turkey. The real value of all debt held in Turkish Lira before 2022 has dropped by a factor of 4. Debt to GDP is at an all-time low. Somehow the holders of that debt seem unlikely to be celebrating, though.

By comparison the Biden administration were very ineffective. They only increased the CPI by 22%. This just won’t get the job done of screwing bondholders enough to restore fiscal stability. Perhaps Trump will do better.

In this vein, the ever-contrary Randall Forsyth of Barron’s today casts the spectre of long rates going to 6%. He quotes various “experts” to support the plausibility of this happening.

I say, go big or go home. Let’s cure the debt crisis in the next four years.

Go for enough inflation to drive interest rates to 10%!

Well, not really. But when you have authoritarians in power who are as usual ignorant of economics anything can happen. And as highlighted above there are advantages.

My own investments are mostly in companies that could handle such increased rates and produce earnings and dividend increases in response to price inflation.

What about you?

Focused Investing News

Forthcoming:

Energy has been the focus for me in January. Midstream Plains All American (PAA) will be out in early February. PAA is a complex story with aspects beyond the current financials. Meanwhile you will see something I’ve been playing with on REIT pricing this next week.

Personal News:

We offered a wonderful wine dinner this past week, featuring small, Spanish wine producers. As the importer traveled across northern Michigan earlier in the week, she heard about the spectacular pairings we produce. She was not disappointed.

The highlight of the event was a Priorat. I bought 1% of their annual production. That was six bottles.

Member News

Material this month has included the following.

Items that went to all members:

• Three of these perspectives articles.

• The review of my 2024 performance.

• A review of how my 2024 Go-Fishing Portfolio performed.

• A brief rant on how foolish it is to base investments on stock charts.

Items that went to paid members, often including a free preview of much of the article:

• My full 2025 Go-Fishing Portfolio article.

• My analysis of Chord Energy. Check out the comments for a worthwhile discussion of valuing commodity companies.

• My analysis of Permian Resources.

• Two Trade Alerts.

• Paid members have access to the Focused Investing chat.

The Google Sheets (for annual members):

• The main attraction on the Google sheet is full disclosure of my live, real-time portfolio. If you are an annual paid member and do not have access, please contact me.

• There are in addition a REIT assessment sheet and a Midstreams assessment sheet, each a tab. And if you scroll down on the portfolio tab, you can see some tickers I track and some playing with possible portfolios.

Also:

• Paid members can also post items of interest on the Focused Investing chat, which I do often. Check it out and post your own items, please. Comments and questions are always welcome.

• There is a search function on the Focused Investing home page, to help look for past articles.

• It can be challenging to search the chat (for paid members only) on mobile devices. To do so, you have to get into the chat so my picture is on the top left, and then punch my nose with your finger. You will see a display with a search emoji.

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