It’s always worth stressing that “billionaire” as a descriptor of “hedge fund investor” is common precisely because the billionaires in the space are so uncommon. Put another way, we hear a lot about the microscopically few hedge-fund billionaires, but rarely about the 99.99% of the would-be billionaires in the space who never reach such hallowed ground.
In a recent column for the Washington Post, Adam Lashinsky confidently asserted that “Borrowers will look back fondly on the era of low interest rates the way middle-aged people consider their youth: It was good while it lasted, but it’s not coming back.” Macro hedge fund managers who are also billionaires would give anything for even a fraction of Lashinsky’s certitude expressed from the sidelines.
The simple truth not grasped by the columnist is that accepted wisdom is generally what successful investors are swimming against. They generally achieve billionaire status via intrepid investments that give them brutal discomfort as they’re putting money to work.
It’s worth thinking about with certitude about the future of rates that extends well beyond Lashinsky. Supposedly those days are gone. Ok, but why? And how would Lashinsky have a clue?
An interest rate is but a price. Historically the greatest instigator of lower prices has been high prices. What’s dear, and credit is relatively dear today, is a summons for more credit.
It’s worth adding that no one borrows money. Instead, they borrow what money can be exchanged for: real resources. Which is just a comment that credit is produced, not decreed by central bankers. Looking into the future, it’s predicted by major names of the Vinod Khosla and Elon Musk variety that machines that can do and think for us will handle 80% of 80% of jobs. Wow! Think about the latter with future rates in mind.
For now, Lashinky asserts that credit was cheap beginning in 2008-2009, but for whom? Speaking of Musk again, he is presently the world’s richest man, but credit was never cheap for him beginning in 2008-09, and rarely after. His career has been defined by endless trips to near ruin due to an inability to access funds. What’s the riddle here? Lashinky tells us credit was so cheap? Was Musk just unaware?
Glossed over by Lashinsky is that the low rates beginning in 2008-09 paradoxically signaled tight credit. No doubt banks were lending inexpensively, but only to the bluest of blue chips. Bank loans must perform, and when the economy is weak only the bulletproof can apply for loans. They borrow inexpensively because paying back the loan is a foregone conclusion.
Beyond blue chips, consider Silicon Valley. Lashinsky professes expertise there. He claims that its recent success has been a consequence of investors “borrowing cheap and spending willy nilly.” Supposedly the new rate environment will force investors to “scrutinize their decisions far more carefully.” Such a view is hard to take seriously.
Was there a technology boom in Japan thanks to the zero rates that have applied there since seemingly the early ‘90s? What about in Europe where its ECB mimicked the Federal Reserve? No, and no. Which should be a statement of the obvious.
Contra Lashsinky, rates of interest realistically don’t apply in Silicon Valley. How could they when just about every start-up funded fails? In which case there’s realistically no rate at which Valley startups can borrow. It’s all equity finance all the time. In other words, there’s no rate high enough to reflect the cost of capital in a locale that Lashinsky naively claims benefited from low rates. It didn’t.
If this is doubted, consider the enormous inflow of capital into AI companies in the 11 months since ChatGPT became a thing. $40 billion is the number being thrown around. But wait, rates have been rising and Lashinksy tells us rising rates shrink investment. Or maybe Lashinsky just doesn't know. As the surge of funds into AI reminds us, where there’s potential there’s abundant capital.
Which is just a reminder that Lashinkshy is talking more than he’s being reasonable. Searching for a story to match rate movements, he’s written the one written by seemingly everyone. Who cares if it doesn’t square with reality?
Still, readers might hold onto Lashinsky’s column. Please hold onto this one too. Since no one knows anything, the bet here is that if AI achieves even a fraction of its suggested potential, production will surge in concert with abundant resources on offer. Rates of interest will decline substantially to reflect this happy reality. How ironic if the very AI that attracted copious funds amid a soaring rate environment proves the catalyst for massive increases in credit, and falling rates of interest. Rest assured that more than a few individuals in the hedge fund space will have billionaire added to their description if so.