Free Capital, Rising Rates and Investments

June 3, 2022

By Tim Courtney, Chief Investment Officer



We accept that a certain level of regulation and policymaking is necessary in economies and markets. Rules must be laid out and understood by all players of the game – a game in which there is both competition and cooperation to function. Ideally, the rules incentivize actions that lead to more efficient markets and improved standards of living.

Sometimes, though, rules incentivize actions that make markets less efficient, and capital, both human and liquid, less productive. We think an example of this occurred in 2020, when the Federal Reserve cut certain interest rates to zero and lowered the cost of borrowing to record lows for many.1

The low borrowing costs, coupled with pandemic stimulus, incentivized novice and professional investors alike to begin speculating and borrowing to lever portfolios higher. This extra money made its way everywhere, including cryptocurrencies, NFTs and meme stocks.2 It helped fuel inflation, which hit levels we haven’t seen in decades.

Unwanted inflation has moved the Fed to reverse course, end its aggressive bond buying and issue a series of rate hikes. We believe this normalization in rates is necessary and a healthy change in the rules of the game.3 But because the free money also caused certain assets to behave strangely over the last few years, we’d like to take some time to revisit how we see and categorize assets.

At Exencial, we classify assets into one of three core categories: speculative, use and investment.

The speculative category can include assets like cryptocurrencies, NFTs, artwork, collectibles and jewelry. Some of these assets may have aesthetic appeal, but they produce no cash flow, and are worth what someone else will pay for them (i.e. only supply and demand determine price). We all probably hold at least some of this type of asset, but because their prices are speculative in nature, we believe these assets should comprise a small percentage of your net worth.

Use assets offer some kind of utility. These can include assets like houses, cars, clothing, food and electricity. The prices of these are based on supply and demand, but also their utility. Because of their usefulness, they should in most cases make up a larger part of a person’s net worth than speculative assets

We focus portfolios primarily on the third category: investment assets. The prices of these assets are determined by supply and demand, but also their expected future cash flows, and can include assets like stocks, bonds, rental properties, farmland, timberland, pipelines, music catalogs, etc. Since we live off cash flows, it is reasonable to invest in productive assets that generate cash flow, rather than speculative assets, which unfortunately are what the free money rules incentivized.

Looking ahead, the Fed will likely make several more interest rate hikes over the next year to bring meaningful cost back to money. Most of these increases have already been priced into markets and caused the volatility we’ve all seen. Here’s to hoping the free money rules aren’t reinstated. If you have any questions, please contact your Exencial advisor.




  1. CNBC (3/15/20) — Federal Reserve cuts rates to zero and launches massive $700 billion quantitative easing program
  2. CNBC (1/30/21) — GameStop, Reddit and Robinhood: A full recap of the historic retail trading mania on Wall Street
  3. Reuters (5/4/22) — Fed lifts rates by half point, starts balance sheet reduction June 1


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