This is the most important chart in the world (for now)

This will be a short post, because I am mostly just echoing the thoughts of the excellent Jim Grant during his appearance on the equally excellent Odd Lots podcast this week. And hopefully anyone who reads this has already prioritized Odd Lots. But it is important enough of a point that it needs to be reiterated as often as possible.

The conventional wisdom guiding markets right now is that yes, interest rates are up, but they will only remain at these elevated levels for a limited amount of time. At some point the economy will break, the Fed will be forced to cut, and we’ll be back to the blissful investing times of the last half decade soon enough.

That is the reason you can get a higher rate on a 12-month CD right now than you can get on a five-year CD. (A real frustration for me and my laddering strategy.)

We see it in the markets as well. Yes, some of the froth is gone. You have to actually generate results to earn a premium. But the premiums being assigned (looking at you Nvidia and your 30x sales multiple) are insane. And artificial intelligence stocks are clearly riding an unsustainable wave.

The biggest thing investors are missing right now, and what Grant articulates so clearly, is that interest rate cycles tend to run so unbelievably long that few of us can even recognize the cycle. Half the U.S. population wasn’t even born when this latest cycle of lower rates began. How on Earth can most of us even recognize there is a cycle?

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Which isn’t to say that the narrative about lowering rates in a recession is wrong. Should the economy go into a recession (something I still very much expect despite the economy’s remarkable resilience so far) the Fed might indeed lower rates. We already appear to be close to a pause.

But we shouldn’t mistake short-term moves for long-term trends.

This chart, with markings by Odd Lots’ Joe Weisenthal, tells the story. For investors, it is the most important chart in the world right now.

The last forty years of interest rates was not some straight decline. There were many reactions to current market conditions. But the trend towards lower highs and lower lows is clear. We all gasped when rates went up in the late 1980s and again in the 1990s. It was the talk of the day. But the long-term trend line is clear.

Grant’s belief is that we are entering a new long-term trend of higher highs and higher lows. One capable of lasting another half century. So even if the Fed does cut by early 2024, it is unlikely to cut all the way to near zero where we were a few years ago. And should it bottom higher, it would have to reach higher the next time rising rates are a concern. And repeat, and repeat, and repeat…

If he’s right (and again, I think he is), the AI bubble can’t last a decade. And tech is likely to fade as well. We as investors are currently burdened by the muscle memory of what has “worked” for the last few decades. We are trading based on the playbook of the last twenty years. That’s causing short-term euphoria in some of our favorite sectors. But will only last for so long.

As an investor, I am not doing much because of all of this. For one, I might be wrong. Also, I try not to time the market in good times or in bad. I do think it is a terrible time to be chasing winners, especially high-multiple tech winners. And generally speaking a good time to be picky, to look at individual stocks more than just pile into trends.

The next big thing is hardly ever the last big thing. With all respect to the massive innovation inside tech, I think that will be the case this time around as well. But if history is a guide, by the time we fully realize the cycle has definitely turned it is too late to dig out from the losses.

Riding the wave can be dangerous.

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