Rising interest rates and the tide rolls out
The past 14 years have seen an unprecedented level of low interest rates and public spending. And in that time, the economy has grown and absorbed the free money with limited impact to inflation
The era of free money is coming to a close however. The Fed has stated that their concern for inflation will be met with rising interest rates until they see inflation come down in a meaningful amount.
It turns out that very few businesses are not impacted by the rise of interest rates. Tech stocks that soared during the pandemic are being hit harder than most (because they were so expensive to begin with).
The shelter in the storm here is what it has always been though. In our last letter we discussed how corporate debt is now on the rise (it turns out when you incentivize borrowing, people do a lot more of it).
Good businesses, however, are tempered in their financing in good times and bad. We will see a wave of defaults in the next few months. And we expect the pace of these defaults to continue with each increase in the interest rate.
One way to identify a good business is to see how a business does in unprecedented times. Alibaba (ticker: BABA) has continued to grow despite the harshest lockdowns in the world. When things return to normal in China, Alibaba will continue to print money and be well positioned to maximize shareholder return.
While you are rebalancing your portfolio, now is a good time to find businesses that will be unfairly beaten up and will continue to perform well for the next 10 years.