The UK, EU and USA. Since our last newsletter the Bank of England cut its rate to 5.00%, and, per a Reuters poll of economists, a further reduction is expected in November. The ECB cut rates this morning to 3.5%. At the annual Jackson Hole symposium, Fed Chair Powell indicated that the Fed would maintain rates in the target 5.25%-5.50% range. He also stated: “The time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.”
We Always Like the Long View and Rates Appear Historically Reasonable. The following chart of the Federal Funds rate from 1980 to present is from the St. Louis Fed.
What Do Current Rates Mean? We believe there is often too much discussion about rates in the short term. The impact of rates on activity may very well be different depending on overall resources and the amount of variable interest rate leverage being used.
For well managed companies, and wealthy groups, high interest rates can be positive. For conservatively run companies and high net worth individuals or families with strong cash positions and low or no leverage, higher interest rates provide money for sitting on cash (i.e. doing nothing). Cash is king….even more so when interest rates are high for prolonged periods. Charlie Munger, deceased Vice Chairman of Berkshire Hathaway was quoted as saying, “It takes character to sit there with all that cash and do nothing.” As of today, Berkshire is sitting on approximately $280 billion in cash, earning interest.
What about high leverage operations or those with variable debt? For high leverage operations or investments with variable interest debt (credit cards, HELOC, variable rate loans, securities loans) — whether a company, a private equity investment, real estate investment or family balance sheet — a change in interest rates can disastrous.
These are not new concepts. However, it seems worth revisiting as market participants often seek optimization without fully appreciating or appropriately addressing the associated risk. There is a wonderful framework and discussion of this topic in Nicholas Taleb’s book “Anti-fragile: Things That Gain From Disorder.”
While attorneys generally like order, it is our view that reality is filled with chaos and disorder at any given moment. When selecting counsel, we suggest that you will want attorneys who appreciate this reality and help prepare you, your company and your investments to survive and even thrive when chaos and disorder inevitably appear.
ABOUT ADISHIAN LAW GROUP, P.C. Adishian Law Group is a California law firm with a statewide M&A practice led by Chris Adishian. To see other transactions, please view our Case Studies and review other Press Releases.
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