See-Saw

I remember spending hours playing on a seesaw as a child laughing as my friends and I went up and down. I was particularly light for my age, so I spent most of the time high in the air. You eventually learned that if you went to the very end, you could lift the heavier kid off the ground and if you scooted forward, the heavier kid could slowly keep you from crashing. What I did not know at that time was that the see saw was not only a lesson in physics, but a lesson in the world of economics.

We spend a lot of time educating our clients at the High Net Worth Advisory Group and one of the stories we like to tell is to think of the see saw to better understand the bond market. Visualize interest rates on one side and the price of bonds on the other. When interest rates rise, bond prices fall and vice versa. That part is simple, what causes interest rates to rise or fall less so.

Currently what is causing the interest rate kid to be so light today (going up) that is causing prices to fall? Interest rates are the same as every other investment as their prices are based on supply and demand. Right now, you have three major drivers of price volatility. 1) The expansive and record setting supply of debt capital to build out an AI platform.  2) The continued runaway spending from our government and reissuing of debt thereby increasing supply.  3) The current conflict in the middle east is stoking the fears of asset eroding inflation; therefore investors are demanding a higher return on invested debt capital.

So, what does this all mean for you? If you are a saver, you want higher interest rates. If you are a borrower, you want lower interest rates. Which side of the see saw do you want to sit on? The answer lies when the market decides that current rates are high enough to show value and current prices have fallen enough to encourage investment. The see saw will then be parallel to the ground giving either child a chance to get off or in the investors’ case, out of their positions or add new money.

I remember sitting on a seesaw with a girl I liked in fourth grade. I also remember that if we both scooted into the middle of the seesaw it would stay flat and we could talk. We were in “equilibrium” yet didn’t even know what that meant. The bond market see saw will soon calm down and return to “equilibrium,” with that the stock market will price in higher for longer rates and after much up and down will return to the middle and give everyone a chance to adjust their seat (risk) knowing that the ups and downs of investing are part of the journey and the only way to win is by staying in the game. Investing is not a game, but the lessons you can learn from playing games will make you very successful over the long run.