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The dawning of a new financial era: The silver lining in rising interest rates

There is much debate about whether rates will rise or fall or stay about here for some time – the latter being my personal stance and prediction. Irrespective…



There is much debate about whether rates will rise or fall or stay about here for some time – the latter being my personal stance and prediction. Irrespective of our own beliefs, I think we can all agree interest rates aren’t going back to the lows we saw when the U.S. Federal Reserve cut rates to zero, and our own Australian banks benefitted from the Reserve Bank of Australia’s (RBA) term funding facility, which provided three-year funding at 0.1 per cent.

It is also highly unlikely we will witness a repeat of the almost four decades of declining interest rates that so helpfully boosted the wealth of generations viz-a-vis the appreciation of all conventional asset classes, and a few unconventional ones too.

In the financial tapestry of recent decades, we’ve done nothing but revel in a climate marked by a period of generously declining interest rates followed by a prolonged period of ultra-low interest rates. Yet, today, the winds of change are upon us, hinting at a departure from this comfortable tailwind. It’s no longer far-fetched to anticipate longer periods of more modest economic growth, and narrower corporate profit margins amid a persistently higher rate of inflation. And where once a corporation might have been able to borrow ‘X’ at an interest rate of ‘i’, they can now only borrow something less than X at an interest rate higher than ‘i’. In such an environment, refinancing will be challenging for many more companies than it has been before. And in such an environment, debt will not rescue private equity ‘misadventurers’. It is, therefore, reasonable to assume an uptick in defaults, particularly amongst those ‘profitless prosperity’ companies I have written about frequently.

And while all of the above is reasonable, it is important not to become too bearish. Commentators and high-profile investors thrive off scaring the wider public. It serves them that there is always another big scary dark cloud on the horizon that everyone should be worried about. If it’s not refinancing the U.S. budget deficit, a war in Ukraine, Israel, or a possible conflict involving China and Taiwan, it’s a recession, rising interest rates and now zombie companies…again. Our industry thrives on imploring investors to look at all the dangers. As Charlie Munger once observed, “What witchdoctor ever gained fame and notoriety by prescribing two aspirin?”

Nevertheless, I don’t think it’s unreasonable to assert that we might see assets appreciating at less predictable rates and businesses wrestling a bit more for financing. Furthermore, the borrowing landscape is shifting – from the once-stable descent (over nearly forty years, I might add) to a terrain of subtle oscillations.

It’s worth emphasising that you should ignore predictions of a dramatic leap back to the sky-high interest rates of the 1980s. I think slight nudges upwards are possible as are slight nudges down. But over time, rates will, I expect, look relatively stable, settling at a generally higher plateau. 

Evolving strategies in a dynamic landscape

The sunset of the golden age of investment strategies that were buoyed by the falling interest rates of the past four decades, is upon us. The 1981-2021 period was an elixir for asset owners, from corporations and private equity investors to property developers and cryptocurrency speculators. The allure of bond returns paled as discount rates took a dip, making riskier assets the darling of the financial world.  And of course, the period was doubly rewarding for those who borrowed to dabble. The popularity of that latter strategy became the fuel for a boom in leveraged buyouts, debt financing of VC-backed companies, margin investing and derivatives trading.

And while investors willing to take bolder bets were reaping the rewards of a rising tide in asset prices, this same environment posed challenges for debt investors. The scramble and competition for attention-grabbing returns meant many had to decide between braving the storm with dwindling returns, dialling back the risk, or amplifying it in the hopes of higher returns. It was a time when true bargains were elusive, tucked away in the shadows of an overly competitive market.

Many a ‘risk-on’ investor might reminisce about the bounties of this era, but it’s prudent to remember the instrumental role played by the rising tide of falling interest rates, the tailwinds of cheap money.

As famed investor John Kenneth Galbraith once wryly observed,

I think without a doubt, that what is called financial genius is merely a rising market”.

That tide, the one that lifted all boats, can be relegated to the annuls of history. It will be a period we look back on most fondly, but it will be firmly in the rearview mirror. But make no mistake; we will still have booms, bubbles and busts, but the booms might last four years, not four decades.

The coming years will paint a very different picture for asset ownership and asset class returns.

Private credit’s time in the limelight

Enter private credit. It has been growing for the last 13 years – since the GFC – but really had no time in the limelight. Until now it was an asset class before its time. But that time has now come – also helped by a cohort of baby boomers who may soon grow tired of the volatility associated with managing a portfolio entirely comprised of equities.

The present shifts in the financial milieu cast private credit in a new, much more favourable light. The ebbing tide of easy money paves the way for private credit to emerge as a bastion of stability and attractive returns. In an era of flux, the allure of consistent monthly cash income and attractive absolute returns from private credit might just be the beacon investors have been yearning for.

As we brace for a world where interest rates remain more elevated, the stage seems set for private credit investments to take their well-deserved place at the front of the line when structuring a balanced portfolio. 

 Table 1. Private Credit’s features and benefits


Consistent cash flow: A primary appeal of private credit investments is the consistent cash flow they can provide. Most private loans, especially to mid-sized businesses, have regular interest payments. This is in contrast to equities, which may or may not provide dividends and can be subject to volatile price swings.


Secured assets: Many private credit investments are secured by tangible assets. If a borrower defaults on their loan, the lender may have a claim to certain assets as collateral. In contrast, equity investors are positioned at the bottom of the capital structure, meaning they are the last in line to receive any remaining assets in the event of bankruptcy.


Protection from volatility: The private credit market is less correlated with public investment market swings than equities. This means that during periods of stock market turmoil, private credit portfolios can act as a ‘cushion’, reducing the overall volatility of an investment portfolio.


Reliable returns: Private credit offers reliable returns based on interest rates set out in loan agreements. This contrasts with equities, where returns are highly dependent on company performance, market perception, and broader economic factors.


Contractual obligations: Whereas returns from equity investments depend on company performance (in the form of dividends or stock appreciation), returns from private credit returns are typically contractually obligated. Borrowers are legally required to make interest and principal payments.


Diversification: Incorporating private credit into a portfolio allows investors to achieve greater diversification. It’s another asset class, with a different risk and return profile compared to equities, that can work to balance out portfolio returns over time.


Higher yield potential: Private credit can offer higher yields than traditional bonds or other fixed-income assets, given its bespoke nature, the direct relationship between investor, manager, originator and borrower, and the link to corporate lending.


Direct relationship with borrowers: The direct relationship between private credit lenders or originators and borrowers, allows for more flexibility in loan terms, better monitoring of the loan, and more efficient negotiations should a borrower face financial difficulties.


Less competition and more opportunity for due diligence: Unlike the equity markets, which are saturated with analysts and institutional investors, the private credit space often has less competition. This may currently allow for more attractive pricing (yields and returns) and the opportunity for patient and in-depth due diligence.


Increasing market and maturity: Over the past decade, the private credit market has matured significantly. With this maturation comes better infrastructure, more data for making informed decisions, and a larger number of experienced participants, making it a more viable investment option for many.

After all, in the realm of finance, it’s the blend of adaptability and vision that crafts the most enduring success stories, and private credit is an asset class whose role in portfolios will likely take more prominence.

Find out more about the Aura Private Credit Funds

You should read the relevant Product Disclosure Statement (PDS) or Information Memorandum (IM) before deciding to acquire any investment products.

Past performance is not an indicator of future performance. Returns are not guaranteed and so the value of an investment may rise or fall.

This information is provided by Montgomery Investment Management Pty Ltd (ACN 139 161 701 | AFSL 354564) (Montgomery) as authorised distributor of the Aura Core Income Fund (ARSN 658 462 652) (Fund). As authorised distributor, Montgomery is entitled to earn distribution fees paid by the investment manager and, subject to certain conditions being met, may be issued equity in the investment manager or entities associated with the investment manager.

The Aura Core Income Fund (ARSN 658 462 652)(Fund) is issued by One Managed Investment Funds Limited (ACN 117 400 987 | AFSL 297042) (OMIFL) as responsible entity for the Fund. Aura Credit Holdings Pty Ltd (ACN 656 261 200) (ACH) is the investment manager of the Fund and operates as a Corporate Authorised Representative (CAR 1297296) of Aura Capital Pty Ltd (ACN 143 700 887 | AFSL 366230). 

You should obtain and carefully consider the Product Disclosure Statement (PDS) and Target Market Determination (TMD) for the Aura Core Income Fund before making any decision about whether to acquire or continue to hold an interest in the Fund. Applications for units in the Fund can only be made through the online application form. The PDS, TMD, continuous disclosure notices and relevant application form may be obtained from or from Montgomery.

The Aura High Yield SME Fund is an unregistered managed investment scheme for wholesale clients only and is issued under an Information Memorandum by Aura Funds Management Pty Ltd (ABN 96 607 158 814, Authorised Representative No. 1233893 of Aura Capital Pty Ltd AFSL No. 366 230, ABN 48 143 700 887).

Any financial product advice given is of a general nature only. The information has been provided without taking into account the investment objectives, financial situation or needs of any particular investor. Therefore, before acting on the information contained in this report you should seek professional advice and consider whether the information is appropriate in light of your objectives, financial situation and needs.  

Montgomery, ACH and OMIFL do not guarantee the performance of the Fund, the repayment of any capital or any rate of return. Investing in any financial product is subject to investment risk including possible loss. Past performance is not a reliable indicator of future performance. Information in this report may be based on information provided by third parties that may not have been verified.

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February Employment Situation

By Paul Gomme and Peter Rupert The establishment data from the BLS showed a 275,000 increase in payroll employment for February, outpacing the 230,000…



By Paul Gomme and Peter Rupert

The establishment data from the BLS showed a 275,000 increase in payroll employment for February, outpacing the 230,000 average over the previous 12 months. The payroll data for January and December were revised down by a total of 167,000. The private sector added 223,000 new jobs, the largest gain since May of last year.

Temporary help services employment continues a steep decline after a sharp post-pandemic rise.

Average hours of work increased from 34.2 to 34.3. The increase, along with the 223,000 private employment increase led to a hefty increase in total hours of 5.6% at an annualized rate, also the largest increase since May of last year.

The establishment report, once again, beat “expectations;” the WSJ survey of economists was 198,000. Other than the downward revisions, mentioned above, another bit of negative news was a smallish increase in wage growth, from $34.52 to $34.57.

The household survey shows that the labor force increased 150,000, a drop in employment of 184,000 and an increase in the number of unemployed persons of 334,000. The labor force participation rate held steady at 62.5, the employment to population ratio decreased from 60.2 to 60.1 and the unemployment rate increased from 3.66 to 3.86. Remember that the unemployment rate is the number of unemployed relative to the labor force (the number employed plus the number unemployed). Consequently, the unemployment rate can go up if the number of unemployed rises holding fixed the labor force, or if the labor force shrinks holding the number unemployed unchanged. An increase in the unemployment rate is not necessarily a bad thing: it may reflect a strong labor market drawing “marginally attached” individuals from outside the labor force. Indeed, there was a 96,000 decline in those workers.

Earlier in the week, the BLS announced JOLTS (Job Openings and Labor Turnover Survey) data for January. There isn’t much to report here as the job openings changed little at 8.9 million, the number of hires and total separations were little changed at 5.7 million and 5.3 million, respectively.

As has been the case for the last couple of years, the number of job openings remains higher than the number of unemployed persons.

Also earlier in the week the BLS announced that productivity increased 3.2% in the 4th quarter with output rising 3.5% and hours of work rising 0.3%.

The bottom line is that the labor market continues its surprisingly (to some) strong performance, once again proving stronger than many had expected. This strength makes it difficult to justify any interest rate cuts soon, particularly given the recent inflation spike.

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Mortgage rates fall as labor market normalizes

Jobless claims show an expanding economy. We will only be in a recession once jobless claims exceed 323,000 on a four-week moving average.



Everyone was waiting to see if this week’s jobs report would send mortgage rates higher, which is what happened last month. Instead, the 10-year yield had a muted response after the headline number beat estimates, but we have negative job revisions from previous months. The Federal Reserve’s fear of wage growth spiraling out of control hasn’t materialized for over two years now and the unemployment rate ticked up to 3.9%. For now, we can say the labor market isn’t tight anymore, but it’s also not breaking.

The key labor data line in this expansion is the weekly jobless claims report. Jobless claims show an expanding economy that has not lost jobs yet. We will only be in a recession once jobless claims exceed 323,000 on a four-week moving average.

From the Fed: In the week ended March 2, initial claims for unemployment insurance benefits were flat, at 217,000. The four-week moving average declined slightly by 750, to 212,250

Below is an explanation of how we got here with the labor market, which all started during COVID-19.

1. I wrote the COVID-19 recovery model on April 7, 2020, and retired it on Dec. 9, 2020. By that time, the upfront recovery phase was done, and I needed to model out when we would get the jobs lost back.

2. Early in the labor market recovery, when we saw weaker job reports, I doubled and tripled down on my assertion that job openings would get to 10 million in this recovery. Job openings rose as high as to 12 million and are currently over 9 million. Even with the massive miss on a job report in May 2021, I didn’t waver.

Currently, the jobs openings, quit percentage and hires data are below pre-COVID-19 levels, which means the labor market isn’t as tight as it once was, and this is why the employment cost index has been slowing data to move along the quits percentage.  


3. I wrote that we should get back all the jobs lost to COVID-19 by September of 2022. At the time this would be a speedy labor market recovery, and it happened on schedule, too

Total employment data

4. This is the key one for right now: If COVID-19 hadn’t happened, we would have between 157 million and 159 million jobs today, which would have been in line with the job growth rate in February 2020. Today, we are at 157,808,000. This is important because job growth should be cooling down now. We are more in line with where the labor market should be when averaging 140K-165K monthly. So for now, the fact that we aren’t trending between 140K-165K means we still have a bit more recovery kick left before we get down to those levels. 

From BLS: Total nonfarm payroll employment rose by 275,000 in February, and the unemployment rate increased to 3.9 percent, the U.S. Bureau of Labor Statistics reported today. Job gains occurred in health care, in government, in food services and drinking places, in social assistance, and in transportation and warehousing.

Here are the jobs that were created and lost in the previous month:


In this jobs report, the unemployment rate for education levels looks like this:

  • Less than a high school diploma: 6.1%
  • High school graduate and no college: 4.2%
  • Some college or associate degree: 3.1%
  • Bachelor’s degree or higher: 2.2%

Today’s report has continued the trend of the labor data beating my expectations, only because I am looking for the jobs data to slow down to a level of 140K-165K, which hasn’t happened yet. I wouldn’t categorize the labor market as being tight anymore because of the quits ratio and the hires data in the job openings report. This also shows itself in the employment cost index as well. These are key data lines for the Fed and the reason we are going to see three rate cuts this year.

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Inside The Most Ridiculous Jobs Report In History: Record 1.2 Million Immigrant Jobs Added In One Month

Inside The Most Ridiculous Jobs Report In History: Record 1.2 Million Immigrant Jobs Added In One Month

Last month we though that the January…



Inside The Most Ridiculous Jobs Report In History: Record 1.2 Million Immigrant Jobs Added In One Month

Last month we though that the January jobs report was the "most ridiculous in recent history" but, boy, were we wrong because this morning the Biden department of goalseeked propaganda (aka BLS) published the February jobs report, and holy crap was that something else. Even Goebbels would blush. 

What happened? Let's take a closer look.

On the surface, it was (almost) another blockbuster jobs report, certainly one which nobody expected, or rather just one bank out of 76 expected. Starting at the top, the BLS reported that in February the US unexpectedly added 275K jobs, with just one research analyst (from Dai-Ichi Research) expecting a higher number.

Some context: after last month's record 4-sigma beat, today's print was "only" 3 sigma higher than estimates. Needless to say, two multiple sigma beats in a row used to only happen in the USSR... and now in the US, apparently.

Before we go any further, a quick note on what last month we said was "the most ridiculous jobs report in recent history": it appears the BLS read our comments and decided to stop beclowing itself. It did that by slashing last month's ridiculous print by over a third, and revising what was originally reported as a massive 353K beat to just 229K,  a 124K revision, which was the biggest one-month negative revision in two years!

Of course, that does not mean that this month's jobs print won't be revised lower: it will be, and not just that month but every other month until the November election because that's the only tool left in the Biden admin's box: pretend the economic and jobs are strong, then revise them sharply lower the next month, something we pointed out first last summer and which has not failed to disappoint once.

To be fair, not every aspect of the jobs report was stellar (after all, the BLS had to give it some vague credibility). Take the unemployment rate, after flatlining between 3.4% and 3.8% for two years - and thus denying expectations from Sahm's Rule that a recession may have already started - in February the unemployment rate unexpectedly jumped to 3.9%, the highest since February 2022 (with Black unemployment spiking by 0.3% to 5.6%, an indicator which the Biden admin will quickly slam as widespread economic racism or something).

And then there were average hourly earnings, which after surging 0.6% MoM in January (since revised to 0.5%) and spooking markets that wage growth is so hot, the Fed will have no choice but to delay cuts, in February the number tumbled to just 0.1%, the lowest in two years...

... for one simple reason: last month's average wage surge had nothing to do with actual wages, and everything to do with the BLS estimate of hours worked (which is the denominator in the average wage calculation) which last month tumbled to just 34.1 (we were led to believe) the lowest since the covid pandemic...

... but has since been revised higher while the February print rose even more, to 34.3, hence why the latest average wage data was once again a product not of wages going up, but of how long Americans worked in any weekly period, in this case higher from 34.1 to 34.3, an increase which has a major impact on the average calculation.

While the above data points were examples of some latent weakness in the latest report, perhaps meant to give it a sheen of veracity, it was everything else in the report that was a problem starting with the BLS's latest choice of seasonal adjustments (after last month's wholesale revision), which have gone from merely laughable to full clownshow, as the following comparison between the monthly change in BLS and ADP payrolls shows. The trend is clear: the Biden admin numbers are now clearly rising even as the impartial ADP (which directly logs employment numbers at the company level and is far more accurate), shows an accelerating slowdown.

But it's more than just the Biden admin hanging its "success" on seasonal adjustments: when one digs deeper inside the jobs report, all sorts of ugly things emerge... such as the growing unprecedented divergence between the Establishment (payrolls) survey and much more accurate Household (actual employment) survey. To wit, while in January the BLS claims 275K payrolls were added, the Household survey found that the number of actually employed workers dropped for the third straight month (and 4 in the past 5), this time by 184K (from 161.152K to 160.968K).

This means that while the Payrolls series hits new all time highs every month since December 2020 (when according to the BLS the US had its last month of payrolls losses), the level of Employment has not budged in the past year. Worse, as shown in the chart below, such a gaping divergence has opened between the two series in the past 4 years, that the number of Employed workers would need to soar by 9 million (!) to catch up to what Payrolls claims is the employment situation.

There's more: shifting from a quantitative to a qualitative assessment, reveals just how ugly the composition of "new jobs" has been. Consider this: the BLS reports that in February 2024, the US had 132.9 million full-time jobs and 27.9 million part-time jobs. Well, that's great... until you look back one year and find that in February 2023 the US had 133.2 million full-time jobs, or more than it does one year later! And yes, all the job growth since then has been in part-time jobs, which have increased by 921K since February 2023 (from 27.020 million to 27.941 million).

Here is a summary of the labor composition in the past year: all the new jobs have been part-time jobs!

But wait there's even more, because now that the primary season is over and we enter the heart of election season and political talking points will be thrown around left and right, especially in the context of the immigration crisis created intentionally by the Biden administration which is hoping to import millions of new Democratic voters (maybe the US can hold the presidential election in Honduras or Guatemala, after all it is their citizens that will be illegally casting the key votes in November), what we find is that in February, the number of native-born workers tumbled again, sliding by a massive 560K to just 129.807 million. Add to this the December data, and we get a near-record 2.4 million plunge in native-born workers in just the past 3 months (only the covid crash was worse)!

The offset? A record 1.2 million foreign-born (read immigrants, both legal and illegal but mostly illegal) workers added in February!

Said otherwise, not only has all job creation in the past 6 years has been exclusively for foreign-born workers...

Source: St Louis Fed FRED Native Born and Foreign Born

... but there has been zero job-creation for native born workers since June 2018!

This is a huge issue - especially at a time of an illegal alien flood at the southwest border...

... and is about to become a huge political scandal, because once the inevitable recession finally hits, there will be millions of furious unemployed Americans demanding a more accurate explanation for what happened - i.e., the illegal immigration floodgates that were opened by the Biden admin.

Which is also why Biden's handlers will do everything in their power to insure there is no official recession before November... and why after the election is over, all economic hell will finally break loose. Until then, however, expect the jobs numbers to get even more ridiculous.

Tyler Durden Fri, 03/08/2024 - 13:30

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