Do We Ever Really Know What to Expect From Rising Interest Rates?

Do We Ever Really Know What to Expect From Rising Interest Rates?

In December, the Federal Reserve raised the federal-funds lending rate by .25%, only the second increase in the past decade.


The day the rate hike was announced I received several calls from journalists, all wanting to know what this means for the economy. My email inbox also started filling up with questions about the effect rising interest rates will have on real estate and stock investments.

My best answer? We never really know what to expect from rising interest rates. The core driver of all free markets is people’s behavior. And our behaviors are largely driven by emotion rather than logic. Even when we think we are being logical, we are often reacting emotionally. Daniel Kahneman’s research shows that we make 90% of all financial decisions emotionally, not logically. It took me some time to accept the truth of that research and the reality that it did apply to me, too.

Let’s consider what rising interest rates might bring to the various markets.


The first asset class we usually become concerned with is the bond market. This is where people and organizations lend money to corporations and governments, in turn receiving a fixed interest rate over a period of time that is typically 3, 5, 10 or even 30 years.

Suppose you bought a bond in which you loaned money to the US government for 30 years at 2.5%. If the going rate increased to 4.5%, you would not be very happy. You would be losing 2% a year in potential income you might earn if your money wasn’t tied up in the 30-year bond. Since the bond isn’t due to be repaid for 30 years, the only way you can get out of it is to sell it. No one is going to want a bond paying 2.5% when they can get 4.5%, so you are going to have to take a loss and sell the bond at a discount. So clearly, when interest rates rise the holders of long-term bonds get clobbered compared to shorter-term bonds.

The reverse is also true. If interest rates go down, the longer-term the bond the more valuable it becomes, as investors become willing pay a premium for bonds with a higher interest rate than the current market rate.

It's hardly surprising, then, that when interest rates are rising many advisors recommend holding short-term or intermediate-term bonds that mature or pay off in 1 to 5 years. The idea is that when interest rates rise, the price decrease of shorter-term bonds is less because of the shorter time to maturity when you get your money back and can reinvest at the higher rates.

From this you might logically conclude that, when interest rates rise, long-term bond prices always fall. Not necessarily.

Dimensional Fund Advisors carried out a case study of four periods of 12 months or more during the past 30 years when interest rates rose 1.5% or more. The periods were December 1976–March 1980 (when rates skyrocketed by 15.25 percentage points), September 1992–June 1995 (3 points), November 1998–December 2000 (1.75 points) and June 2003–August 2007 (4.25 points). Notably, in two of these four periods of rising interest rates, long-term bonds did better than shorter-to-intermediate-term bonds. In the other two periods (1998–2000 and 1976–1980), longer-term bonds did worse than short-term.

The bottom line is that we can’t depend on any markets to be logical. The bond market, like the stock market, is a free market driven by emotions. This human factor is a good reason not to take bets with your long-term investments on what the market response will be to anything.

Rick Kahler
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Rick Kahler, MSFP, ChFC, CFP is a fee-only financial planner, speaker, educator, author, and columnist.  Rick is a pioneer in integrating financial planning and psycholog ... Click for full bio

China's Push Toward Excellence Delivers a Global Robotics Investment Opportunity

China's Push Toward Excellence Delivers a Global Robotics Investment Opportunity

Written by: Jeremie Capron

China is on a mission to change its reputation from a manufacturer of cheap, mass-produced goods to a world leader in high quality manufacturing. If that surprises you, you’re not the only one.


For decades, China has been synonymous with the word cheap. But times are changing, and much of that change is reliant on the adoption of robotics, automation, and artificial intelligence, or RAAI (pronounced “ray”). For investors, this shift is driving a major opportunity to capture growth and returns rooted in China’s rapidly increasing demand for RAAI technologies.

You may have heard of ‘Made in China 2025,’ the strategy announced in 2015 by the central government aimed at remaking its industrial sector into a global leader in high-technology products and advanced manufacturing techniques. Unlike some public relations announcements, this one is much more than just a marketing tagline. Heavily subsidized by the Chinese government, the program is focused on generating major investments in automated manufacturing processes, also referred to as Industry 4.0 technologies, in an effort to drive a massive transformation across every sector of manufacturing. The program aims to overhaul the infrastructure of China’s manufacturing industry by not only driving down costs, but also—and perhaps most importantly—by improving the quality of everything it manufactures, from textiles to automobiles to electronic components.

Already, China has become what is arguably the most exciting robotics market in the world. The numbers speak for themselves. In 2016 alone, more than 87,000 robots were sold in the country, representing a year-over-year increase of 27%, according to the International Federation of Robotics. Last month’s World Robot Conference 2017 in Beijing brought together nearly 300 artificial intelligence (AI) specialists and representatives of over 150 robotics enterprises, making it one of the world’s largest robotics-focused conference in the world to date. That’s quite a transition for a country that wasn’t even on the map in the area of robotics only a decade ago.

As impressive as that may be, what’s even more exciting for anyone with an eye on the robotics industry is the fact that this growth represents only a tiny fraction of the potential for robotics penetration across China’s manufacturing facilities—and for investors in the companies that are delivering or are poised to deliver on the promise of RAAI-driven manufacturing advancements.

Despite its commitment to leverage the power of robotics, automation and AI to meet its aggressive ‘Made in China 2025’ goals, at the moment China has only 1 robot in place for every 250 manufacturing workers. Compare that to countries like Germany and Japan, where manufacturers utilize an average of one robot for every 30 human workers. Even if China were simply trying to catch up to other countries’ use of robotics, those numbers would signal immense near-term growth. But China is on a mission to do much more than achieve the status quo. The result? According to a recent report by the International Federation of Robotics (IFR), in 2019 as much as 40% of the worldwide market volume of industrial robots could be sold in China alone.

To understand how the country can support such grand growth, just take a look at where and why robotics is being applied today. While the automotive sector has historically been the largest buyer of robots, China’s strategy reaches far and wide to include a wide variety of future-oriented manufacturing processes and industries.

Related: Smooth Tomorrow's Market Volatility With a Smart Approach to Robotics & AI

Electronics is a key example. In fact, the electrical and electronics industry surpassed the automotive industry as the top buyer of robotics in 2016, with sales up 75% to almost 30,000 units. Assemblers such as Foxconn rely on thousands of workers to assemble today’s new iPhones. Until recently, the assembly of these highly delicate components required a level of human dexterity that robots simply could not match, as well as human vision to help ensure accuracy and quality. But recent advancements in robotics are changing all that. Industrial robots already have the ability to handle many of the miniature components in today’s smart phones. Very soon, these robots are expected to have the skills to bolster the human workforce, significantly increasing manufacturing capacity. Newer, more dexterous industrial robots are expected to significantly reduce human error during the assembly process of even the most fragile components, including the recently announced OLED (organic light-emitting diode) screens that Samsung and Apple introduced on their latest mobile devices including the iPhone X. Advancements in computer vision are transforming how critical quality checks are performed on these and many other electronic devices. All of these innovations are coming together at just the right time for a country that is striving to create the world’s most advanced manufacturing climate.

Clearly, China’s trajectory in the area of RAAI is in hyper drive. For investors who are seeking a tool to leverage this opportunity in an intelligent and perhaps unexpected way, the ROBO Global Robotics & Automation Index may help. The ROBO Index already offers a vast exposure to China’s potential growth due to the depth and breadth of the robotics and automation supply chain. As China continues to improve its manufacturing processes to meet its 2025 initiative, every supplier across China’s far-reaching supply chains will benefit. Wherever they are located, suppliers of RAAI-related components—reduction gears, sensors, linear motion systems, controllers, and so much more—are bracing for spikes in demand as China pushes to turn its dream into a reality.

Today, around 13% of the revenues generated by the ROBO Global Index members are driven by China’s investments in robotics and automation. Tomorrow? It’s hard to say. But one thing is for certain: China’s commitment to improving the quality and cost-efficiency of its manufacturing facilities is showing no signs of slowing down—and its reliance on robotics, automation, and artificial intelligence is vital to its success.

Want all the details? Download the ROBO Global Investment Report - Summer Brings Best ROBO Earnings in Six Years or visit us here.

ROBO Global
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ROBO Global LLC is the creator of the ROBO Global® Robotics and Automation Index series, which provides comprehensive, transparent and diversified benchmarks representing the ... Click for full bio