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How do interest rates affect my portfolio?

 

The better question to ask is: "How do interest rates NOT affect your portfolio?" 

 

Interest rate manipulation is the single greatest economic impact of our lifetime. In 1971, President Nixon cut the gold window and effectively ended the Bretton Woods monetary system that connected the US dollar to a specified measure of gold. This was the end of ‘sound money’ and fiscal budget management, and the beginning of central bank’s untethered control of the money supply and the US dollar. This is the definition of a debt-based economy. Our currency is not tied to any real asset – only the promise to repay that dollar when called upon. There is no asset backing to our currency or our Treasury issuance.  Only a promise to pay by the ‘Full Faith and Credit of the US Government’. This is fine in the short run, but not when you have $20+ trillion in government debt (not including unfunded liabilities). 

 

The US dollar is the de-facto global reserve currency. This means that it’s the go-to medium of exchange to settle payments for most people in the world. For the last 48 years, this has allowed the Federal Reserve to manipulate the currency and create massive amounts of debts for the United States. They continued to cut the interest rates lower and lower upon each recession (1987, 2001, 2008, and then recently in 2019 and then again in 2020) and devalue the dollar by creating currency units.

 

The problem now is that the other central banks of the world followed suit with this strategy, and we have a massive central bank currency manipulation taking place that’s come to the end of the road.  Currency is the basis for any portfolio and is like an immune system. If your immune system is sick, then there’s nothing that’ll prevent you from dying no matter how sound and healthy your body is. Our currency is sick, and it’ll affect everything in your portfolio.

 

You have to acknowledge this – that interest rates effect our currency and that this affects everything ­– because the dollar is the Global Reserve Currency. The entire global economic cycle hinges on the interest rate decisions of the Federal Reserve Bank of the United States. 

 

As you build your portfolio, you have to make sure you know how leveraged (in debt) a company is.  You need to know this because you need to ensure that you’re holding companies that are not subject to massive repricing in currencies or interest rates that could cause the stocks to plummet. You need to ensure that your portfolio is built to spread around interest rate risk so you’re not concentrated in one sector (Oil & Gas Explorers) that‘s so intimately subject to interest rates that any sneeze or change could cause extreme volatility.

 

You have to be aware that interest rates have the single greatest impact to your financial life...down to the fact that you probably started your financial search to learn more about investing because when you go to your local bank or your online bank, you get literally no return for saving money.