The end of easy cash calls for a progressive solution
Until the US Federal Reserve began tightening monetary policy in March last year, central banks had kept interest rates near zero for the best part of 15 years, initially to contain the fallout from the 2008 Global Financial Crisis, then in response to Covid-19. But even before that unprecedented period of quantitative easing, interest rates in the developing nations of the West had been trending lower since the 1980s.[1]
There were several structural factors at play in the long-term decline of interest rates. For one thing, western growth rates had eased, reducing demand for investment capital, even as the supply of credit expanded on the back of the savings of ageing populations in the rich world and increasing ranks of mass affluent in the fast-growing economies of Asia.
Monetary policy had also gained greater credibility. In response to the high inflation of the 1970s extending into the early ‘80s, central banks around the world were given greater independence and mandated to keep inflation low. This helped anchor expectations for inflation and interest rates at lower levels – helping to make the belief that monetary policy would be effective at keeping inflation low self-fulfilling. Meanwhile, globalisation and cheap Chinese exports actually brought down prices for goods across the world.
But in 2022, a confluence of soaring energy and food prices, supply bottlenecks and the post-pandemic rebound in demand prompted the return of inflation.
In an effort to quell it, the US Fed has now raised interest rates to their highest level in 22 years as of July 2023.[2]
Because the rate hikes take time to filter through to companies and consumers, the full impact has yet to be felt across various sectors of the economy. They could prompt a coming wave of corporate and mortgage debt defaults, and put pressure on business revenues and profits.
For investors, the impact of higher rates has been compounded by a decline in banks’ risk tolerance[3] amid the current economic climate as well as a crisis of consumer confidence afflicting the industry. Banks in the US[4] and Europe,[5] in particular, have tightened their lending standards, even though high interest rates have led to demand for money falling.
Where do we go from here?
Opinions diverge on where interest rates will go from here. Even though inflation is finally trending down in the US,[6] Europe[7] and elsewhere, policymakers have warned they may still keep rates high for some time.[8] And it seems unlikely that they will return to near zero in the foreseeable future.
One reason for this is that while inflation is cooling, it will likely not return to the low levels of the past two decades owing to the decline of globalization and rising costs in China and other emerging markets.
The world is also likely to witness a massive increase in demand for capital for the energy transition. Efforts to combat climate change will require trillions in annual investment by 2030, considerably increasing demand for credit at a time traditional lenders are retreating.
And to some extent, the credibility of monetary policy may have been diminished by its inability to bring inflation down quickly. Therefore, expectations that inflation will stick around could prove partly self-fulfilling, necessitating interest rates to stay higher for longer to have the desired effect.
It seems the era of easy cash has definitively come to an end.
Private finance will help sustain businesses
With higher rates contributing to a worsening credit crunch,[9] private financing will become an increasingly crucial source of capital to sustain business growth and fund investments. Among its various forms, securities-backed financing in particular is proving to be an increasingly popular and stable source of liquidity for corporate and personal needs.
EquitiesFirst has a 20-year track record in providing such progressive capital, designed to transcend the limitations of traditional financing. Securities-backed financing from EquitiesFirst is a long-term sale-and-repurchase agreement with no restrictions on the use of proceeds and an attractive interest rate. At the end of the term, the investor’s original number of securities or digital assets are returned to the investor by EquitiesFirst, regardless of any changes in their underlying price.
As the arrangement is also on a non-recourse basis, the investor’s maximum loss would be the shares they initially transferred to us.
Moreover, owing to our private ownership, we do not rely on external financing or credit lines that could be withdrawn in times of crisis, nor do we manage capital for external investors.
We also strive to limit risk through the increasingly sophisticated, technology-based processes we apply to deal origination, underwriting and risk management.
In addition, we have invested in our own in-house research capabilities to help ensure full vetting of every opportunity and careful collateral management. We only provide capital against shares after a thorough fundamental and technical analysis, and we run a diversified portfolio across sectors and geographies to mitigate broader market risks.
We approach every deal as an opportunity to add to our long-term public equities portfolio, and steer clear of the risky, highly leveraged strategies that have caused so much trouble for private banks and their clients in the past – and are likely to continue causing problems for them in the current era of higher-for-longer interest rates.
[1] https://blogs.deloitte.co.uk/mondaybriefing/2023/02/a-higher-new-normal-for-interest-rates.html
[2] https://www.nbcnews.com/business/economy/interest-rate-hike-july-2023-how-much-higher-federal-reserve-rcna96210
[3] https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/european-loan-growth-cools-as-banks-tighten-lending-standards-71731259
[4] https://www.cnbc.com/2020/08/03/banks-say-they-are-tightening-lending-standards-even-as-demand-for-money-falls.html
[5] https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/european-loan-growth-cools-as-banks-tighten-lending-standards-71731259
[6] https://apnews.com/article/inflation-prices-interest-rates-economy-federal-reserve-53d93610b5ccaacd097853593f29bc26
[7] https://www.ft.com/content/5dfccc86-f490-4841-9397-7ef399edef57
[8] https://www.cnbc.com/2023/07/26/low-fed-interest-rates-reshaped-the-us-economy-heres-whats-next.html
[9] https://www.reuters.com/business/finance/credit-squeeze-biggest-threat-economic-outlook-asset-managers-2023-04-19/
Until the US Federal Reserve began tightening monetary policy in March last year, central banks had kept interest rates near zero for the best part of 15 years, initially to contain the fallout from the 2008 Global Financial Crisis, then in response to Covid-19. But even before that unprecedented period of quantitative easing, interest rates in the developing nations of the West had been trending lower since the 1980s.[1]
There were several structural factors at play in the long-term decline of interest rates. For one thing, western growth rates had eased, reducing demand for investment capital, even as the supply of credit expanded on the back of the savings of ageing populations in the rich world and increasing ranks of mass affluent in the fast-growing economies of Asia.
Monetary policy had also gained greater credibility. In response to the high inflation of the 1970s extending into the early ‘80s, central banks around the world were given greater independence and mandated to keep inflation low. This helped anchor expectations for inflation and interest rates at lower levels – helping to make the belief that monetary policy would be effective at keeping inflation low self-fulfilling. Meanwhile, globalisation and cheap Chinese exports actually brought down prices for goods across the world.
But in 2022, a confluence of soaring energy and food prices, supply bottlenecks and the post-pandemic rebound in demand prompted the return of inflation.
In an effort to quell it, the US Fed has now raised interest rates to their highest level in 22 years as of July 2023.[2]
Because the rate hikes take time to filter through to companies and consumers, the full impact has yet to be felt across various sectors of the economy. They could prompt a coming wave of corporate and mortgage debt defaults, and put pressure on business revenues and profits.
For investors, the impact of higher rates has been compounded by a decline in banks’ risk tolerance[3] amid the current economic climate as well as a crisis of consumer confidence afflicting the industry. Banks in the US[4] and Europe,[5] in particular, have tightened their lending standards, even though high interest rates have led to demand for money falling.
Where do we go from here?
Opinions diverge on where interest rates will go from here. Even though inflation is finally trending down in the US,[6] Europe[7] and elsewhere, policymakers have warned they may still keep rates high for some time.[8] And it seems unlikely that they will return to near zero in the foreseeable future.
One reason for this is that while inflation is cooling, it will likely not return to the low levels of the past two decades owing to the decline of globalization and rising costs in China and other emerging markets.
The world is also likely to witness a massive increase in demand for capital for the energy transition. Efforts to combat climate change will require trillions in annual investment by 2030, considerably increasing demand for credit at a time traditional lenders are retreating.
And to some extent, the credibility of monetary policy may have been diminished by its inability to bring inflation down quickly. Therefore, expectations that inflation will stick around could prove partly self-fulfilling, necessitating interest rates to stay higher for longer to have the desired effect.
It seems the era of easy cash has definitively come to an end.
Private finance will help sustain businesses
With higher rates contributing to a worsening credit crunch,[9] private financing will become an increasingly crucial source of capital to sustain business growth and fund investments. Among its various forms, securities-backed financing in particular is proving to be an increasingly popular and stable source of liquidity for corporate and personal needs.
EquitiesFirst has a 20-year track record in providing such progressive capital, designed to transcend the limitations of traditional financing. Securities-backed financing from EquitiesFirst is a long-term sale-and-repurchase agreement with no restrictions on the use of proceeds and an attractive interest rate. At the end of the term, the investor’s original number of securities or digital assets are returned to the investor by EquitiesFirst, regardless of any changes in their underlying price.
As the arrangement is also on a non-recourse basis, the investor’s maximum loss would be the shares they initially transferred to us.
Moreover, owing to our private ownership, we do not rely on external financing or credit lines that could be withdrawn in times of crisis, nor do we manage capital for external investors.
We also strive to limit risk through the increasingly sophisticated, technology-based processes we apply to deal origination, underwriting and risk management.
In addition, we have invested in our own in-house research capabilities to help ensure full vetting of every opportunity and careful collateral management. We only provide capital against shares after a thorough fundamental and technical analysis, and we run a diversified portfolio across sectors and geographies to mitigate broader market risks.
We approach every deal as an opportunity to add to our long-term public equities portfolio, and steer clear of the risky, highly leveraged strategies that have caused so much trouble for private banks and their clients in the past – and are likely to continue causing problems for them in the current era of higher-for-longer interest rates.
[1] https://blogs.deloitte.co.uk/mondaybriefing/2023/02/a-higher-new-normal-for-interest-rates.html
[2] https://www.nbcnews.com/business/economy/interest-rate-hike-july-2023-how-much-higher-federal-reserve-rcna96210
[3] https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/european-loan-growth-cools-as-banks-tighten-lending-standards-71731259
[4] https://www.cnbc.com/2020/08/03/banks-say-they-are-tightening-lending-standards-even-as-demand-for-money-falls.html
[5] https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/european-loan-growth-cools-as-banks-tighten-lending-standards-71731259
[6] https://apnews.com/article/inflation-prices-interest-rates-economy-federal-reserve-53d93610b5ccaacd097853593f29bc26
[7] https://www.ft.com/content/5dfccc86-f490-4841-9397-7ef399edef57
[8] https://www.cnbc.com/2023/07/26/low-fed-interest-rates-reshaped-the-us-economy-heres-whats-next.html
[9] https://www.reuters.com/business/finance/credit-squeeze-biggest-threat-economic-outlook-asset-managers-2023-04-19/
