May 2022The arithmetic makes it plain that inflation is a far more devastating tax than anything that has been enacted by our legislatures. Warren Buffett
With interest rates trending down for more than 40 years, investors have enjoyed a powerful tailwind supporting outsized bond and equity market returns. When in 2007 it looked like the party might be ending, central banks responded by providing liquidity stimulus through quantitative easing, expanding their balance sheets and turning easy money into free money. And, as risk free rates of return became negative, it was not surprising that equity markets climbed strongly supported by both rising corporate profitability and valuation expansion. But what happens when nominal interest rates start moving up as inflation rises to levels not seen since the 1980s?