Years ago, while working for Merrill Lynch, it was my pleasure to meet one of the most successful brokers in the firm. He had made millions by successfully managing his clients investments. I asked him "What is your secret to investment success?" He replied. "It is simple. When interest rates go up, I sell stocks. When interest rates go down, I buy stocks."
25 years later, as I review that man's "secret" his logic still holds true in the equity and stock markets of the world.
What industries, nations, and investments suffer when interest rates go up?
1. Industries that have large fixed capital investments. Such as airlines, trucking, rail roads, industrial manufacturing facilities, all of these investments are usually financed or leveraged with loans. When interest rates go up, it can be devastating for the airline industry, for example, because they pay interest on every airplane that they buy. This usually means higher ticket prices for air travelers.
2. Industries that are "real estate" heavy. Real estate, becomes less valuable when interest rates go up, because investors can make more money in interest rate paying investments, such as bonds or CD's, or savings accounts. Therefore investment flows away from real estate into other investments. Furthermore, higher rates make it harder for investors to afford real estate housing, commercial buildings, retail shopping centers, or apartment complexes.
3. Nations that have high debt, such as Mexico, Argentina, Brazil, or the United States all suffer when rates go up. Nations that have little debt gain in power and relative strength.
4. Nations that have high cash flow exports of natural resources tend to do better when interest rates go up, because they exchange those exports for cash that can be invested at the higher rates.
5. Individuals that have much cash and liquid investments prosper when interest rates go up. Investors who are heavily leveraged or in debt, suffer when rates go up. Farmers suffer, because usually they have to pay high rates on farm equipment or land to purchase it. The higher cost to farmers often translates to higher costs of food for consumers.
RATES ARE GOING UP!
We said all of the above, because rates have started an increase and will likely go higher for several months, perhaps years. The Federal Funds rate just increased by 1/4 of 1%, but the symbolic power of this is great. Rates will continue to increase regardless of who wins the elections and what political regime is in power. If you are smart and quick, you can find ways to profit from the situation.