Most are still positioned like it isn’t because they don’t believe it.

When I started on an arbitrage desk in the early 80s, rates had been steadily rising for almost 40 years. I worked with guys with scars and stories from the 60s and 70s. They traded with the muscle memory that any move down in rates was a head fake. They didn’t debate whether rates would rise or fall.

There was nothing to debate. The people who thought otherwise were already gone by then.

James Grant says interest rates are the price of money, the most important price in capitalism. He also notes that interest rate markets are long-trending, rising and falling at generational intervals for more than 150 years, and that no single theory explains why.

What do you do when money is free and time horizons are infinite? Consumers, investors, corporations, and sovereigns didn’t have to guess. The answer was to borrow. Then borrow more at better rates. Not borrowing wasn’t caution. It was dumb. Prudence was for the old goats from another era.

We swim in the water of interest rates, but we don’t always step back and ask, “Where are we, really?” It’s the Wall Street version of David Foster Wallace’s fish story: two young fish are swimming along when they meet an older fish swimming the other way, who nods and says, “Morning, boys. How’s the water?” The two young fish swim on for a bit, and eventually one looks over at the other and says, “What the hell is water?”

Most capital structures are built with the muscle memory that the water doesn’t change.

The cool water of falling rates supported asset valuations. The S&P has gone up for more than 40 years. Who has to worry? Now, as the water gets hot and rates rise, like the traders in the 80s, we think it’s a head fake.

What if it isn’t?

In a recent podcast, DoubleLine’s Jeffrey Gundlach noted that “we have seen long cycles of interest rates that typically go on for about 40 years… We had falling interest rates that went all the way into really 2020… we are no longer in a secular declining interest rate environment… I’ve been of the opinion that the secular decline in interest rates is over.”

If the cycle has turned, it’s not just that financing gets more expensive. The window may not be open.

I don’t know where rates are going. I do know that the smartest people in the room the last time they changed direction didn’t get the joke for about 10 years.

Last time rates changed direction, it was a 40-year tailwind for markets. It was time to get in the water. If that tailwind is now a headwind, the next 40 years won’t be as funny.

Now, what do you do? We won’t have clarity for a decade. In the meantime, it’s time to start getting out of the water by lightening the debt load and replacing some with good old-fashioned equity.

So you’re still around, maybe scarred, to tell the stories.