27
Aug
2019

Share

One reason why the Fed can’t raise rates

A lot is being written about the low interest rate environment in which we find ourselves. And rightly so: we would rank this as the number one most powerful force affecting asset prices today.

As for the reasons behind the interest rate dynamics we are seeing, there are many – including those related to demographics, technology and globalization. But there is another really simply reason why interest rates can’t increase on a sustained basis: indebtedness.

Take the United States, for example. At around 100 per cent government debt to GDP, this means that for every one per cent increase in interest rates, this equates over time to increased interest expense that needs to be funded by the annual budget – to the tune of one per cent of GDP. Said another way, this is akin to one per cent of negative fiscal stimulus.

The chart below was recently published by the Congressional Budget Office. It shows the annual budget of the US federal government, expressed as a percentage of GDP. The pink bars show the primary surplus/(deficit) which is the budget balance before the effect of interest. The green bars then show the net interest component – which, despite the low interest rate environment, is becoming more negative. Why? Because of the increased government borrowings required to fund the recent Trump tax cuts.

Screen Shot 2019-08-26 at 11.26.48 am

 

Should interest rates rise, the green bars would become significantly more negative – and the government may be forced to offset these with more positive pink bars. How do you make the pink bars positive? You raise taxes or cut government spending – both of which would damage growth and therefore push interest rates back down. Through this lens, the more that governments borrow, the more certain we can be that interest rates won’t rise.

Our Funds

The Montgomery Fund

  • AUSTRALIA/NZ
  • Concentrated high conviction equities
  • From $25,000
Learn More

Montgomery Global Fund

  • GLOBAL
  • Concentrated high conviction equities
  • From $25,000
Learn More

Montgomery Alpha Plus Fund

  • GLOBAL
  • A market neutral strategy
  • From $50,000
Learn More

Montaka Global Access Fund

  • GLOBAL
  • Access long/short global equity portfolio
  • From $50,000
Learn More

Montgomery Global Equities Fund (ASX:MOGL)

  • GLOBAL
  • Concentrated high conviction equities
  • No minimum investment - see your broker limits
Learn More
Close

Our Funds

Concentrated High Conviction Equities

Listed

Montgomery Global Equities Fund (ASX:MOGL)

Global
Available on the ASX as an Exchange Traded Managed Fund, invests in 15 to 30 quality global businesses for long-term capital growth with a target distribution yield of 4.5% per annum. Mirrors the strategy of the Montgomery Global Fund.
Unlisted From $25,000

Montgomery Global Fund

Global
Invests in 15 to 30 quality global businesses for long-term capital growth. Priced daily. Mirrors the strategy of the Montgomery Global Equities Fund (ASX:MOGL).
Unlisted from $25,000

The Montgomery Fund

Australia/NZ
Aims to provide long-term growth and income by investing in 20 to 40 high-quality Australian and New Zealand businesses trading at attractive valuations. Priced daily.
New Fund

Montgomery Small Companies Fund

Australia/NZ
Aims to provide long-term growth by investing in 30 to 50 high quality, undervalued, Australian and NZ small and emerging companies with strong growth potential. Priced daily.
Unlisted from $1 Million

The Montgomery [Private] Fund

Australia/NZ
Seeks to deliver absolute returns from a portfolio of high-quality Australian and New Zealand businesses. Capital preservation is paramount. By invitation only.

Alternate Equity Strategies

Unlisted from $50,000

Montgomery Alpha Plus Fund

Global
Aims to generate positive returns in both rising and falling markets. Invests in 80 to 180 global businesses expected to deliver above-average returns, while selling short a similar-sized portfolio expected to deliver below-average returns. Priced daily.
Unlisted from $50,000

Montaka Global Access Fund

Global
Aims to generate materially higher risk-adjusted returns, net of fees, than is generally available in the equities market over the medium term. Priced monthly. Provides retail investors access to the Montaka Global Fund.
Unlisted From $1 Million

Montaka Global Fund

Global
Aims to generate materially higher risk-adjusted returns, net of fees, than is generally available in the equities market over the medium term. By invitation only.