Easy Money

Summary

• The author began writing memos in 1990 and published a warning about tech sector excesses on the first business day of 2000, inspired by Edward Chancellor's book Devil Take the Hindmost.
• The author read Chancellor's book The Price of Time in autumn 2022 after receiving a recommendation from reader Zach Kessler.
• A December 2022 memo titled Sea Change discussed the 13-year period from 2008 to 2021 characterized by ultra-low interest rates.
• Low interest rates during this period made it easy to run businesses, enjoy asset appreciation, leverage investments, obtain financing, and avoid bankruptcy.
• The author compares the effect of low rates to an airport moving walkway that helps travelers move faster without them attributing the speed to their own effort.
• Low interest rates stimulate the economy by reducing business costs & putting money into consumer hands, though this can lead to excessive growth & inflation.
• Low rates reduce perceived opportunity costs because the interest earned on cash balances is minimal, making withdrawals for purchases or investments seem painless.
• Lower discount rates increase the present value of future cash flows, which lifts asset prices & makes riskier assets appear relatively attractive.
• Low returns on safe assets encourage investors to take additional risks to achieve desired returns, a behavior described as becoming "handcuff volunteers."
• Falling interest rates cause the yield curve & capital market line to shift downward & can flatten the capital market line, reducing risk premia.
• Low rates encourage malinvestment by prompting businesses to invest in projects with distant payoffs that do not justify the initial outlay.
• Argentina issued 100-year bonds in 2017 that were oversubscribed due to low yields but resulted in a default less than three years later.
• Investors in the 2010s purchased leveraged buyout loans with historically low yields, while "zombie" companies borrowed easily before financial conditions tightened.
• The craving for returns in low-return environments can enable scams, with Theranos & FTX cited as prominent recent examples.
• Long-dated bonds & growth stocks are particularly sensitive to interest rate changes, rising significantly when money is easy & falling when it dries up.