Rates Stay High, Economy Runs Hot
Liam@helloliam
+1.8%
since Oct 9
The idea
I think rates stay higher for longer because the economy keeps running hot, so I built a basket around companies that earn on other people's money: brokers, payroll processors, a futures exchange and insurers, plus banks and industrials that benefit when both rates and growth stay up. No single name is more than a slice of the total, and I keep a small cash reserve to add if a rate scare drags stocks down. I'd rethink this if the Fed starts cutting and growth clearly cools.
What it owns
- Brokers, payroll processors and exchanges hold large amounts of client money and earn interest income when rates are high. · Charles SchwabIt earns interest on the cash clients hold in their accounts, so higher rates directly boost its income from idle balances., Interactive BrokersIt captures a large share of interest earned on customer cash and margin loans, linking its profits directly to rate levels., CME GroupIt operates the main exchange for interest rate contracts and earns on the cash collateral traders deposit, with higher trading activity when rate expectations are uncertain., Automatic Data ProcessingIt holds payroll money for employers for a few days before disbursement and earns interest on those balances during higher-rate periods., PaychexIt earns interest on payroll deposits held temporarily for small business clients before they are paid out to workers.32%
- Insurers invest premium collections before paying claims, so higher rates increase investment income on that float. · ChubbIt maintains a large bond portfolio funded by insurance premiums, earning higher returns on reinvested proceeds when rates rise., ProgressiveIt collects auto insurance premiums upfront and invests them until claims arrive, so higher yields increase income from that investment pool., TravelersIt invests business insurance premiums in bonds, so higher yields directly boost the income it earns on premium float each year., AllstateIt collects home and auto premiums ahead of claims and earns interest on the invested premiums during higher-rate environments.21%
- Banks earn wider margins on loans when rates rise, and a strong economy supports loan repayment and deal activity. · JPMorgan ChaseIt earns wider spreads between what it pays depositors and what it charges borrowers when rates are high, and a busy economy drives more lending and fees., Bank of AmericaIt funds lending through low-cost customer deposits, so its loan profits expand significantly when interest rates rise., Wells FargoIt earns higher margins on consumer loans when rates are elevated and borrower repayment remains steady., U.S. BancorpIt earns wider margins on loans to local businesses and consumers when interest rates are high and loan demand remains strong.20%
- Machinery, equipment rental and steel companies see higher sales and pricing when the economy runs at full capacity. · CaterpillarIt sells heavy equipment to construction and mining operators who increase purchases when economic activity is strong., United RentalsIt rents equipment to contractors and can raise rental rates and improve utilization when building and industrial activity are robust., EatonIt supplies electrical and industrial components to factories, data centers and utilities expanding capacity during periods of strong economic growth., Parker-HannifinIt makes motion and control components used across industrial machinery, so its sales reflect the pace of factory production and equipment orders., NucorIt produces steel for construction and manufacturing, with prices and volumes rising when economic activity and building projects are accelerating.19%
- Cash8%