A Reminder On Leverage

So 25 basis points (which is now “anticipated”) is good for a ~300 point DOW selloff?
No. What’s good for the selloff is the recognition that is slowly seeping into people’s minds that 40 years of generally declining interest rates are over.
Here’s why it matters.
Let’s say the rate of interest is 10% (and it was not all that long ago — the 1980s.)
You borrow $1 million. Your interest payments are $100,000 a year.
Now the rate of interest drops to 5%. Your interest payment is now $50,000 a year, which sounds great. But what sounds even better is borrowing another million dollars for the same $100,000 a year, and so that’s what you do.

This post was published at Market-Ticker on 2016-09-10.