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Summary: Key takeaways about intuitive eating

A very good evening from the rapidly changing world of finance! On the evening of May 20th, shortly before the eagerly awaited Nvidia figures and amid renewed speculation about talks between Iran and the USA that could affect oil prices and interest rates, Zsolt Janos and Martin met for an in-depth conversation about an often underestimated topic: the invisible danger when interest rates kill growth.

While Martin enjoyed a young French white wine and Zsolt tasted a 20-year-old Ron Centenario from Costa Rica, it quickly became clear: The topic of liquidity and interest rates requires calm and grounding – and is more complex than it seems at first glance.

The challenge of rising interest rates: A global debt burden

The discussion began with the current interest rate environment and Trump's repeated calls for lower rates. A look at the trend paints a clear picture: While Europe has experienced more moderate interest rate developments, US interest rates have been on a veritable rollercoaster ride in recent years. Currently, 10-year US Treasuries are yielding 4,63% and 30-year Treasuries 5,17% – both above the critical levels of 4,5% and 5%, respectively, considered for the stock markets.

Martin, a proven bond specialist, highlighted the serious global debt situation: We are currently exceeding the threshold of 350 trillion US dollars in global debt . This is distributed as follows:

• States: approx. $107 trillion
• Company: approx. $101 trillion
• Households: approx. $67 trillion

The impact of this debt is enormous. An interest rate hike of just one percentage point translates to an additional $3,5 trillion in annual interest payments . This becomes particularly critical when one considers that global GDP accounts for only about a third of this total debt. High interest rates have a far greater dampening effect on growth today than they did in the 70s, when debt levels were significantly lower.

Use of capital: Who pays the bill?

Zsolt Janos emphasized that not only the interest rate is crucial, but above all, what the borrowed capital is used for . Companies generally aim to invest debt in productive capital to cover interest and principal payments. For private households, this is more mixed, but they too must eventually repay their debts.

The situation is most problematic for states . They often lack the necessary calibration for productivity and debt repayment. States tend to accumulate a huge debt burden instead of paying it off. Refinancing historically low-interest debt at current, significantly higher interest rates poses major challenges for many countries. Budget consolidation is a Herculean task for states, as it affects laws, commitments, and numerous stakeholders.

The issuance of hundred-year bonds , as Austria has also done, raises moral questions: Do current generations benefit, while the repayment is shifted to distant, future generations who have not benefited from it?

Liquidity as the lifeblood of the markets

A key point of discussion was liquidity . Zsolt criticized the often naive notion that certain investments will "always rise, without a doubt." A price increase always presupposes that there are enough buyers with the necessary liquidity. Without this liquidity, no price can be reached, regardless of how high the claims are.

In times of crisis, such as the 2008 financial crisis or the COVID pandemic, central banks intervened massively to keep markets liquid. Through so-called "quantitative easing" programs, they bought illiquid bonds and other assets from market participants, thus pumping fresh money into the system. Mario Draghi's famous phrase "Whatever it takes" from 2011 encapsulated this determination to restore confidence in the market.

However, withdrawing this liquidity is extremely difficult, as Zsolt illustrated with the "toothpaste analogy." The independence of central banks is crucial in this process. Political interference, as demonstrated by the example of Turkey and the lira crisis, can have catastrophic consequences. Furthermore, monetary policy measures only take effect on the real economy after a delay of six to seven months.

Inflation and energy: Paradoxes of the current economy

Current inflation is primarily driven by supply-side factors , mainly energy shortages (e.g., due to the Strait of Hormuz), and not by excessive demand, which is even declining in some areas. Paradoxically, high oil prices can be a boon for the development of alternative energies, as they make investments in battery technology and solar energy more profitable again.

Politics here often follows a zigzag course, making long-term planning difficult, unlike in countries such as China. The historical comparison of oil prices is also interesting: while in the 60s one had to work for 16 minutes to buy a liter of gasoline, today it only takes 6 minutes. This suggests that the economy may be able to withstand higher interest rates than the "magic" 4,5% yield on the 10-year US Treasury bond would suggest – always keeping in mind the critical debt-to-GDP ratio of no more than three times the country's economic output.

The real estate market in a field of interest rate tension

The real estate market is a prime example of the effects of liquidity and interest rates. Many properties serve as collateral for loans, and price increases have been largely fueled by the availability of debt financing. Zsolt Janos provocatively asks: What would happen if all loans were suspended tomorrow? Prices would have to fall drastically.

As a general rule, rising interest rates tend to cause property values ​​to fall, while falling interest rates cause them to rise – similar to the situation with bonds. This logic holds true as long as real estate is primarily financed through loans. The period of zero interest rates tempted many to take out variable-rate loans and use high leverage, which is now causing difficulties for many real estate companies, as interest costs increase and rental losses are added to the mix.

The massive inflation following the pandemic, triggered by pent-up demand and "free money" combined with supply chain problems, has further exacerbated the situation. The question of where the liquidity in over-indebted real estate companies has disappeared to often remains unanswered.

Liquidity: Function instead of return

The widespread misconception that liquidity must necessarily generate a positive return was clearly refuted by Zsolt Janos: "Liquidity has no return function, but a liquidity function." The populist claim that "savers are being expropriated" is too simplistic. Those who consciously hold liquidity to remain capable of acting and seize opportunities should not automatically expect a return on their purchasing power.

Even investors like Warren Buffett strategically hold large amounts of cash (Berkshire Hathaway: $400 billion ). The key is to find a balance: never being 100% invested, but also never being 100% uninvested. Liquidity provides peace of mind, allows you to seize opportunities, and prevents you from being blackmailed.

A look at the bond market

The global bond market, with a volume of around US$28 trillion, is gigantic and driven by investors, traders, arbitrageurs, and ETFs. However, banks have largely withdrawn from proprietary bond trading due to increased capital requirements (keyword: Basel II/III). Every euro a bank invests in its trading book must be backed by a certain amount of equity capital, making the business less attractive, especially for lower-rated bonds.

The 2008 financial crisis demonstrated the extreme illiquidity of the bond market, when no one wanted to set prices and trading practically came to a standstill.

Conclusion: Understand liquidity, protect assets

The discussion between Zsolt Janos and Martin underscores the fundamental importance of liquidity in the financial markets. It is often overlooked, but crucial for every investor. When making purchase decisions and considering exaggerated promises of "guaranteed rising" investments, it is essential to use common sense and ask: Who will have the liquidity to pay me out, when, from where, and why?

There is no one-size-fits-all formula, as each investor's individual situation is crucial. However, an awareness of these mechanisms and the importance of maintaining a certain level of liquidity to sell assets and convert them into cash when needed is invaluable.

Would you like to learn more about how to optimally structure your assets in a constantly changing environment and strategically leverage liquidity? Zsolt Janos and his team are available for individual consultations.

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