Aaron is too young to know 5.42%, but I could hold on to it like a chinning bar. That’s the average interest rate in the USA over the last 50 years. During that period the high was 20% in 1980 (thank you, Jimmy Carter) and the low was 0.25% in 2008 (thank you, George Bush).1
My first home mortgage was an APR sliding between 12%-7% in 1985 and I felt lucky to get it. How do I sum up the high-lows I’ve slogged through? I’m reminded of a column I once read by author Sloan Wilson titled, “Things I Have Learned After 50 Years.” "Liquid shoe polish does not work, a good marriage is an unearned blessing, the reason people get along is as mysterious as the reason the fight.” 2
Looking at the stock and bond markets, I think of them as a bickering couple where each is always trying to exert primacy. But if you look to the 5.42% average,3 it’s clear a 60/40 portfolio will once again see you through a lifetime of bickering. What I’ve also observed after 50 years watching interest rates is: their influence is highly exaggerated.
When interest rates tanked, NJ Governor Chris Christy cancelled the new rail tunnel under the Hudson River (2010) declaring it too expensive and too dependent on a portion of the funding provided by New Jersey. Thirteen years later, we still have no tunnel. If no one waved their arms up and down in 2010 saying “1% interest rate, you fool, now is the time,”4 what does it say about the connection between interest rates and progress?
The latest consumer news stories tell us that consumer spending has not slowed, even though the interest rate on a home has climbed to over 7%.5 People are financing exciting vacations on their credit cards. Are we headed for a credit meltdown or is human nature the better determiner of human progress than the Fed?
A firm rule of return is that money invested at 6% doubles every 12 years. That used to be the mantra for bond investors and CD holders. The past (roughly) 10 years have been an anomaly that likely happens once in 50 years, or even 100 years: interest rates so low they go negative. In the short-term, the level of interest rates do put brakes on commercial real estate construction, home purchases, and sometimes stock market values.
But in the long-term, the rate is much harder to pin to real economic growth. During the 10 years of super low interest rates, can you name any great infrastructure project that got off the ground? Yet now, with much higher rates, the Federal infrastructure bill is having some real results. And it isn’t just us. The Europeans are building a 35.5 mile rail tunnel under the Alps (Brenner Base Tunnel) that will connect Narvik, Norway with Palermo, Italy. It won’t be finished until 2030. Wonder what those bonds cost? 6
So the relationship between interest rates and progress seems a little sketchy, no matter what Henny Penny reporters say in financial columns. I’ve never heard of people deferring pleasure or progress because of higher interest rates that balance toward the historical averages around 6%.7 If you believe you can still make a buck, the world is yours.
So give a call or send an email to Aaron asking him if your investment portfolio allocation should be 60/40 to take advantage of 5.42% interest rates.
1.Trading Economics, United States Fed Funds Rate.
2. New York Magazine, unspecified date and issue, quote remembered by the author.
3. Trading Economics, United States Fed Funds Rate.
4. NorthJersey.com https://www.northjersey.com/story/news/transportation/2020/10/29/10-years- since-arc-demise-eyes-gateway-fate-post-election/3745617001/#
5. bankrate.com https://www.bankrate.com/mortgages/mortgage-rates/ 6. Wikipedia https://en.wikipedia.org/wiki/Brenner_Base_Tunnel
7. Advisor Channel, https://advisor.visualcapitalist.com/us-interest-rates/
Aaron Schindler CFP®