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The Free Money Era
This article was written in late-2020. It’s background for an upcoming piece.
If you’re under 40 years old, then you haven’t had experience dealing with rising rates. Your portfolio has been a one-way bet.
We will start by reviewing the environment we’ve grown accustomed to living in.
It’s important to remember how quickly we can forget financial history.
I graduated university in early 1990s and was born in the late 1960s => part of the first generation to come of age after the inflationary 70s.
The mentors of my early career had been deeply influenced by price-inflation.
When my mentors had been young adults, they were influenced by financial survivors of the Great Depression.
Inflationary & Energy Shocks
Sky High Interest Rates
As a result, I received a very conservative financial education.
Back in 2020, we were told we didn’t have enough inflation. I'm not sure about that => the price to buy $1 of cash flow had skyrocketed.
I'll post the last 40 years of price inflation below.
I see inflation at work, but differently.
Inflation is not necessarily a bad thing. There's never been a better time to be world-class at solving problems. The price of human capital has been bid up strongly.
The cause has been a tsunami of money, driven by the price of money falling.
In the chart below:
Red Line: Long Term Interest Rates
Blue Line: Price Inflation
If you’re an economist then we could quibble about what metrics to choose. I don’t think it matters.
The trend is clear.
The real cost of money has been declining for more than 40 years.
Something I failed to see, when I was working in Finance, was the benefit received from:
The global money tsunami
Constantly dropping long term rates
Increasing investor allocations to our sector
Add non-recourse leverage, ring fence the deals/funds and there was no way to lose.
Of course, we didn't see it that way:
We were smart.
We worked hard.
We were visionaries.
Now I’m not so sure.
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Next, thoughts on the (possible) end of the free money era.
Inflation took off from the end of 2020 (Blue Spike Below).
History tells us, it can take a while to get inflation back under control.