Walter Bagehot, the 19th century editor of The Economist, wrote in an article in the Inquirer on July 31, 1852 that “John Bull can stand a great deal, but he cannot stand two per cent.” He continued:

“People won’t take 2 per cent; they won’t bear a loss of income. Instead of that dreadful event, they invest their careful savings in something impossible - a canal to Kamchatka, a railway to Watchet, a plan for animating the Dead Sea, a corporation for shipping skates to the Torrid Zone. A century or two ago, the Dutch burgomasters, of all people in the world, invented the most imaginative occupation. They speculated in impossible tulips.”

And three centuries years later they invested in SPACs, cryptocurrencies, WeWork, ARKK and all kinds of other speculative garbage. When interest rates are too low, investors look for mischief. And they usually find it because Wall Street stands ready to provide it.

Today, after more than a decade, John Bull (or as Americans call him, John Q. Public) no longer has to settle for two percent (or less). He can earn nearly 4% on one-to-two year Treasuries (3.7% on 6-month Treasuries). The curve inverts after that with ten-to-thirty year Treasuries yielding ~3.5% but nobody should lend money to the U.S. government for that long for that little unless they are mandated to do so (i.e. to match long term liabilities). There is finally a somewhat reasonable alternative (I say “somewhat” because these Treasury yields are still negative on a real basis but beggars can’t be choosers) to stocks for the first time since the Great Financial Crisis and investors would be wise to take advantage of them. Today fewer than 16% of S&P 500 stocks pay higher dividends than the two-year Treasury note, according to Strategas, without the very real risk of principal loss facing stocks as the Fed continues to hike rates.

The Fed is going to raise rates by 75 basis points tomorrow. That will bring Federal Funds to 3.25%, still well below the inflation rate. The fact that Fed Funds sit today at a lowly 2.5% indicates how slow the Fed reacted to the inflation threat, but we are where we are. Fed Chair Powell is purportedly modeling Fed icon Volcker these days and saying he will risk a recession to quash inflation, but he will has big shoes to fill (Mr. Volcker was not only tall in stature but exhibited a character and integrity Mr. Powell has yet to demonstrate - but we are rooting for him).

By year end the Fed should raise Fed Funds to 4% and start to see more of the effects of 400 basis points of tightening start to do their work. That can’t be good for stocks and those who think otherwise do so at their own (and their clients’) risk. The system needs a serious flush and reestablishment of riskless rates much closer to a positive real level to restore financial stability, growth and productivity.

In the meantime, John Bull should collect 4% and hope rates stay at decent levels for a long time not only his own sake but for the sake of his fellow citizens.