Gerstner calculates that 150 bps lower discount rates should add two to three turns to software multiples.
“If I reduce my discount rate on any growth software company by 150 bps over the next ten years, the multiple will go up by two to three turns, right?”
Gerstner predicted every one percent move in ten-year treasury causes 10 to 20 percent drawdown in growth multiples.
“Right? And for every 1% move in the ten year, you've got a 10 to a 20% drawdown in growth multiples.”
Gerstner reports the Fed expects 2% negative real rates by year-end, with 4.3% inflation and 2.3% ten-year rate.
“They said we expect inflation exiting the year to be 4.3 and we expect the ten year to be around 2.3.”
Gerstner states a 1% change in interest rates causes 15-20% change in valuation multiples.
“the iron law of investing is interest rates. A 1% change in rates leads to a 15 or 20% change in a multiple.”
Gerstner highlights the shift from zero rates to 8% mortgages as evidence of dramatic policy change.
“We've gone from effectively a 0% interest rate environment in ZERP, where corporations borrowed for free and consumers borrowed for free, to now we have 8% mortgages.”
Gerstner notes rates have jumped from zero to 8% mortgages, 10% car loans, and 20% credit cards.
“We've gone from effectively a 0% interest rate environment in ZERP, where corporations borrowed for free and consumers borrowed for free, to now we have 8% mortgages. We have 10% car loans.”
Gerstner lists specific consumer borrowing costs: 10% car loans and 20% credit cards.
“We have 10% car loans. We have 20% credit cards. Student loans are about to kick in.”
Gerstner predicts the ten-year treasury will settle in a three to four percent range, creating a highly investable period.
“I think we're going back to a period of three to four on the ten year, a highly investable period.”
Gerstner explains falling inflation increases economic restrictiveness, requiring rate cuts to maintain same restrictiveness level.
“every month that inflation goes down, the effective restrictiveness of the economy goes up, holding all else equal. So you gotta take rates down just to keep it at the same level of restrictiveness.”