Sorry but ain't no way 10 year is going to 5-6%... I'd wager it's very likely peaked at 3.5% and it won't break that again (for this cycle).
Valuation multiples are (relatively) crushed, and I don't think we'll see much more of a multiple compression. What we will see, in both private and public markets, is when businesses adjust their earnings forecasts for the (very likely) impending recession. If you look at Wall Street numbers companies are still forecasting growth pretty every quarter through 2023. Now, that doesn't seem very likely to me.
The deal is, the public markets will overreact as always and sell off harder, but private equity will stay more fairly valued because of it's inherent lack of liquidity (two wrongs make a right).
Oh, I very much hope you're proven right. I mean, almost no one wants higher interest rates -- except the Fed, whose priority is curtailing inflation. I'm not sure anyone can predict rates accurately. Consider that just over a year ago, almost everyone was talking about rates going negative, and look at what actually happened!
I mean I speak out if my ass and don't want to pretend to be the sole arbitrator of truth... I'm far from it. But the odds of the benchmark rate going negative were very slim. The Fed didn't need to counter deflation with interest rates when they could just print print print.
I would love to have heard your thoughts as of 1Q21 on 3.5% using the same inputs.
There were brand-name crossover (I won't call them HFs) folks claiming that we would never see positive inflation ever again (right before that fateful Apr-21 print)
I mean I won't name names, but yeah. Best-fit line on CPI was pointing to below zero within the decade (and a common statement was 'humans see crossing 0 as a major milestone, but numbers do not') and we had already seen deflation more or less happening in Japan [0] Italy [1] Switzerland [2] Greece [3] and other small economies with slow-growing population.
Hell, depending on what you believe about globalization and the nature of capital formation, one can still make a compelling contrarian argument that the developed world will see significant disinflation until we start getting serious about global warming (or global warming gets more serious, which is likely what will come first).
To be fair, none of those 4 countries listed have quite the level of control over their currencies' supplies like the US Federal Reserve.
On the "contrarian argument", I see the case for that having deflationary pressure. However, I believe the Fed will try it's damnedest to prevent deflation, at all costs, for the foreseeable future. I also think the US birth rate will find a floor sometime in the next 20 years, at which point (very hopefully) politicians will have gotten serious about immigration reform.
I agree on the 10-year. We might get Fed Funds above 5%, but the market won't expect that to continue for 10 years. (Mathematically, the 10-year yield should equal the expected average Fed Funds rate over the next ten years).
I disagree that valuations have been crushed. You qualified that with a "relatively". We're lower than at the peak of the bubble of course but Shiller PE is still 30, higher than any time other than the dot-com bubble and the current bubble.
Private equity firms will choose not to write down the value of their assets, but the actual transactable prices will probably drop further than public stocks.
Valuation multiples are (relatively) crushed, and I don't think we'll see much more of a multiple compression. What we will see, in both private and public markets, is when businesses adjust their earnings forecasts for the (very likely) impending recession. If you look at Wall Street numbers companies are still forecasting growth pretty every quarter through 2023. Now, that doesn't seem very likely to me.
The deal is, the public markets will overreact as always and sell off harder, but private equity will stay more fairly valued because of it's inherent lack of liquidity (two wrongs make a right).