When People Stop Being Polite, and Start Getting Real
The article reflects on the reboot of the reality TV show "Real World" and uses its iconic phrase "When people stop being polite, and start getting real" to introduce a discussion on the significance of real interest rates—calculated as the Federal Reserve's Fed Funds rate minus inflation measured by Core PCE—in assessing economic conditions and risk assets, noting that real rates at or below zero generally signal positive economic implications.
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“When People Stop Being Polite, and Start Getting Real”
Wealth Management
April 5, 2021
April 5, 2021 11:46 AM
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As if I wasn’t feeling old enough already with my 30-year college reunion on the horizon (COVID-19 permitting) the folks at Paramount+ go and reboot the original “Real World” as “Real World Homecoming: New York.” The original launched 29 years ago, and introduced many of us to reality TV as well as the show’s famous opening, which includes the iconic line “When people stop being polite, and start getting real.”
It ties nicely with the focus of today's Weekly Wire, real interest rates, which are among the more important barometers for the economy and risk assets, but a subject not frequently covered by the financial media. When folks in our business talk about real rates, they are typically discussing the Fed Funds rate. This is the rate banks charge other banks for lending excess cash from their reserve balances on an overnight basis and is set by the Federal Reserve, minus the rate of inflation – as established by a broad and accepted measure of inflation, like the Core PCE. The Core PCE measures the price consumers pay for a basket of goods and services excluding food and energy.
At a high level, real rates at or below zero tend to be a positive for the economy because that should mean the cost of capital is low and that consumers and companies are incentivized to borrow, spend and invest. What we have seen over the past 30 years – excluding the recent pandemic-driven downturn – is that real rates need to get north of 3% before the U.S. economy is at risk of recession. Well, with the Fed Funds rate at zero, and the Core PCE at approximately 1.4%, real rates are deeply negative here in the U.S., and we should add, around the world. Monetary policy remains exceptionally supportive of the economy and risk assets.
The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital Investments, LLC, a registered investment advisor. 1146-BCI-04/05/2021
Tagged: Tim Holland, weekly wire, market perspectives, interest rates, monetary policy
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