FOMC Interest Rates and Cash Yields – A Personal Perspective

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Despite the hazey conditions, I was able to enjoy my Sunday morning run with a few of my die-hard pals. Not only did we enjoy a good workout this morning (possibly against the doctor's advice to run with such high PSI), we had an amazing discussion about the stock market!

The run is always enjoyable as we would be talking and sharing during the one good hour jog.

Two main takeaways about work and life to share with readers today:

 

1. Always have Plan B in life
Someone asked me what was keeping me so late in the office these days.

I mean real late, like near or past mid-night hours. The reason is that there have been organisational changes at the top level in my workplace and with more colleageues who are new to their roles in Asia, there comes a tremendous need for business reviews and restructuring.

This reinforces the wisdom that we must always get Plan B ready should the pink slip day comes-- the reality of corporate life.

 

2. A Personal Take on the Federal Open Market Committee Interest Rate Hike (FOMC)

All eyes would be on this week's FOMC, as investors anticipate Janet L. Yellen's decision for an interest rate rise.

Many investors have remained sidelined in the recent weeks or since August. Rather, many have pulled out from the markets have seen in the net outflows of funds from multiple sources, be it Lipper, iShares, EPFR reports which shows it across asset classes. Monies have largely remain in market money or cash.

My take is, she is likely to do so given the stable economic data in the US, employment, growth, housing starts etc. She is an economist, not a capitalist. Market performance is not in her scorecard. US Economic improvement is. She will be unfazed by the "turmoil" China has created recently. Her focus is an improved US economy that will drive domestic demand and consumption.

The reality is that interest rate is near zero for a decade now. Even if rates rises, it is barely 0.25% or 25 basis points (bps, which is a term I am used to).

Compared to an average of 6% in the past 30 years, the case of a bear market when interest rates rise (in case some of you may have this view) is not anywhere in sight.

Corporate health of US companies have improved since the GFC, global financial crisis. Companies are less leveraged now. Balance sheet have improved as Carpax expenditure was suppressed in the earlier years hence accumulating strong cash. In the recent 3 years, earnings have resumed and hence, we saw 71% of S&P companies beating estimates this year.

So much about these macro boring stuff, the key point of our discussion this morning is -- even with rise in interest rates, it is most probably very very low, 25bps is only a fraction of
the rise in inflation. What will cash yield for us assuming interest rates increase by 25bps every quarter or 100bps a year... and 4% over 4 years?

I compare Cash, which is used to generate yield compared with a ship which is made to set sail, in this beautiful quote from Albert Einstein:
"A ship is always safe at the shore - but that is NOT what it is built for."

While many investors would perceive keeping cash on hand as a safe alternative, I believe low cash yields would not make keeping money as cash an attractive alternative.

Just as this insightful quote stirs our mind and desire to discuss about stock ideas, our hour long jog comes to an end.

Have a great week ahead, all my friends!

Jas Lim

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