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Interest rate vs Asset prices Cycle

Updated: May 6, 2021


200 years of interest rate cycle

- an average full cycle of 70 years and half cycle of 35 years

It took 35 years to complete the previous uptrend of the US interest rate cycle from 1946 to 1981.

It took another 34 years to complete the last downtrend of the US interest rate cycle from 1981 to 2015.

With the loose monetary policy adopted across the globe, especially since after 2008, inflation is almost unavoidable and it is likely to see a continuous rise in interest rate not just a few years but many to come

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Impact on the fall of interest rate

- Inversed relationship between interest rate and stock markets

In 1981 when US interest rate hit it's peak at around 20%, Dow Jones low in the 80s was at 729.

Then after 1981, US interest rate started it's declined to 0.25% till December 2015 and Dow Jones recent high was at 26,951. That's a 37 times appreciation.

When interest rate fall, it is cheaper to borrow. For eg. businesses, they will likely to borrow and build factories and put in more machinery for expansion.

How about in Asia?

- Inversed relationship between interest rate and property markets

The investors in the East has a different culture, they prefer properties than equities. Since the 80s till the recent years, properties in Asia has appreciated about 30 times too.

For property investing, it is too cheaper to borrow as well, putting down the minimum initial payment and borrow the rest. When the demand increases because of low interest rate, naturally property prices increases.

Investors being ignorance about long term market cycle is understandable

If you are 30 years old in 1980, today you will be 68 years old. I was 8 years old then, today I am 46, a middle aged man. In this generation, including those who born after me, the last 38 years or less, as we grow, our experience was asset prices will certainly continue to appreciated. Unknowingly, we have been conditioned to think that way.

However, if we studied into a longer time horizon or cycle, we will understand certain cycle's trough will stay longer than what we have experience in 1997 Asia Crisis and 2008 Lehman crisis. The last 2 crisis, their recovery time was within a one year period or a "V" shaped recovery.

We need to prepare for a "U" shaped recovery on the coming crisis, and the recovery time may take years to decades.



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