Ariel Investments’ Charles Bobrinskoy: Interest rates are headed higher

>> ALL RIGHT. WELCOME BACK TO THE EXCHANGE. KELLY WILL BE BACK TOMORROW. MARKETS OVERALL THEY'RE DOWN A LITTLE BIT RIGHT NOW. THE DOW IS OFF 6/10 OF 1% OR ABOUT 310 POINTS. AND KIND OF A BIT OF AN UNUSUAL DAY. OIL IS LOWER BUT BOND YIELDS ARE MOVING BACK HIGHER. AND YOUR NEXT GUEST SAYS WE'RE KIND OF IN THE MIDDLE OF AN INTERESTING RATE CYCLE DUE TO INFLATION, BUT ONE HE DOES NOT EXPECT TO END QUICKLY. JOINING US NOW TO TALK ABOUT THAT AND MORE, CHARLIE BOBRINSKOY. HE IS VICE CHAIRMAN OF ARIEL INVESTMENTS. I GUESS, CHARLIE, THE YOU KNOW, THE QUESTION EVERYBODY SORT OF HAS IS THE NON AI QUESTION IS HOW HIGH ARE RATES GOING TO GO? >> YEAH, THAT IS THE QUESTION. AND THE REASON IS THE QUESTION IS BECAUSE INVESTORS WHO ARE IN THEIR 40S OR 50S HAVE NEVER SEEN A RISING INTEREST RATE ENVIRONMENT. WE HAD 40 STRAIGHT YEARS FROM 1981 UNTIL 2020, OF DECLINING INTEREST RATES IN EVERY TEN YEAR PERIOD. IF YOU STARTED PICKED ANY DATE IN THOSE 40 YEARS, TEN YEARS LATER, INTEREST RATES WERE LOWER. AND THAT HAS ENORMOUS IMPLICATIONS FOR INVESTING. IT FAVORS LEVERAGED COMPANIES. IT FAVORS, FRANKLY, LONG DURATION TECH COMPANIES. IT FAVORS LBOS. BUT NOW WE'VE GOT A REVERSAL GOING ON. AND IT'S IT'S A WHOLE NEW WORLD WHEN RATES ARE GOING UP. MY GENERAL VIEW ON THIS IS THAT THERE ARE A LOT OF THINGS IN PLACE STRUCTURALLY FOR INFLATION THAT ARE PUSHING RATES HIGHER. AND WE CAN TALK ABOUT THE SPECIFICS OF THAT. BUT INTEREST RATES ARE FUNDAMENTALLY DRIVEN BY INFLATION INFLATIONARY EXPECTATIONS, AND THOSE ARE HEADED HIGHER. >> I'LL TALK ABOUT THAT. BUT I'M MORE INTERESTED TO HEAR ABOUT THIS NEW WORLD THAT YOU JUST REFERRED TO. CHARLIE, WHAT DO YOU THINK IS THE THE NEW WORLD, AND DOES IT MEAN THAT OUR VIEWERS AND LISTENERS AND YOUR CLIENTS SHOULD BE INVESTING IN A NEW WORLD? >> YEAH. I MEAN, I THINK ONE ANALOGY I WOULD MAKE TO THIS IS IF YOU WERE SOMEBODY THAT WAS IN THE BUSINESS OF SHIPPING GOODS FROM NORTH AMERICA TO EUROPE, AND YOU HAD A SAILBOAT, YOU ALWAYS HAD PREVAILING WINDS AT YOUR BACK, AND THAT HELPED YOUR BUSINESS. IT HELPED YOUR BOAT GET ACROSS THE OCEAN FAST. THAT'S WHAT WE'VE HAD FOR 40 YEARS WITH DECLINING INTEREST RATES. IF YOU DO AN EXCEL SPREADSHEET, JUST A DISCOUNTED CASH FLOW ANALYSIS, AND YOU DROP THE INTEREST RATE THAT YOU'RE DISCOUNTING EARNINGS BY ABOUT 1%, YOU GET A 16% INCREASE IN THE VALUE OF YOUR STOCK PORTFOLIO. AND THAT HAS HAPPENED TIME AND TIME AGAIN OVER THE LAST 40 YEARS. NOW IT'S REVERSING. WE GOT DOWN TO AN UNSUPPORTABLE LEVEL OF INTEREST RATES, 0.65% IN 2020. AND NOW WE'RE HEADING THE OTHER WAY, AND IT'S GOING TO HIT CERTAIN KINDS OF INVESTMENTS HARDER THAN OTHERS. >> LIKE WHAT? WHAT'S IT GOING TO HIT? >> SO MY THESIS ON THIS IS THAT THE LEVERAGED BUYOUT INDUSTRY AND ALTERNATIVE ASSET MANAGEMENT HAS BEEN UNRECOGNIZABLY OR UNAPPRECIATED, HELPED BY FALLING RATES. FALLING RATES HELP LEVERAGE COMPANIES, FALLING RATES INCREASE MULTIPLES. AND THAT'S BEEN A BIG DRIVER OF PRIVATE EQUITY RETURNS OVER THE LAST 40 YEARS. IT HELPS LONG DURATION ASSETS. GROWTH STOCKS HAVE THEIR CASH FLOWS OUT IN THE FUTURE. AND SO IF INTEREST RATES FALL, IT MAKES THOSE DISTANT CASH FLOWS WORTH MORE. THAT'S BEEN A WONDERFUL TAILWIND FOR LONG DURATION GROWTH STOCKS. REAL ESTATE HAS BEEN HELPED BY DROPPING INTEREST RATES. AND THAT'S NOW GOING TO CHANGE. SO I THINK CAN I CAN I CAN. >> I CAN I, CAN I JUMP I'M SORRY TO INTERRUPT YOU CHARLIE, BUT I LOVE THIS. I LOVE THIS TRAIN OF THOUGHT. AND I'M GOING TO SAY SOMETHING THAT'S GOING TO OFFEND PROBABLY A BULK OF THE AUDIENCE. SO I APOLOGIZE IN ADVANCE, WHICH IS LOW RATES. IT SOUNDS LIKE WHAT YOU'RE SAYING IS SHORTER. CHARLIE BOBRINSKOY LOW RATES MADE EVERYBODY SEEM SMARTER, RIGHT, BRO? I BOUGHT A HOUSE FOR 200. NOW IT'S WORTH FIVE. ANY INVESTMENT YOU BOUGHT, YOU THROW A DART, THE STOCK WENT UP, YOU THROW A DART, THE HOUSE WENT UP. YOUR PRIVATE EQUITY EXECUTIVE. RIGHT. EVERY INVESTMENT YOU MADE MADE MONEY. AND EVERYBODY THINKS THEY'RE A GENIUS. AND I'M SURE THERE'S A LOT OF GENIUSES OUT THERE. RIGHT. WHAT DID WHAT DID GARRISON KEILLOR SAID? 85% OF PEOPLE ARE ABOVE AVERAGE. THAT'S OBVIOUSLY A JOKE. IS IT GOING TO BE A LOT HARDER THE NEXT FEW YEARS? THAT'S THE POINT. YOU'RE GOING TO NEED TO ACTUALLY BE SMARTER. IT'S GOING TO BE HARDER. AND THROWING A DART AT EVERYTHING AND HAVING IT GO UP IS NOT GOING TO BE THE WAY IT'S GOING TO GO FOR THE NEXT FEW YEARS. WITH RATES WHERE THEY ARE. >> THAT I VERY MUCH AGREE WITH WHAT YOU JUST SAID WITH ONE CAVEAT, AND THAT IS WHAT'S IMPORTANT IS THE CHANGE IN RATES. IT'S OKAY TO HAVE A 5.27% TEN YEAR IF IT STAYS THERE, BUT WHAT WE HAD FOR 40 YEARS WAS DROPPING RATES, AND THAT CAUSED MULTIPLE EXPANSION AND IT HELPED LEVERAGE COMPANIES. SO NOW IF WE HAVE INCREASING RATES FROM 5.27, THAT'S GOING TO HAVE THE OPPOSITE EFFECT. SO IT'S THE FIRST DER