Finance

The hunt for a new phone or car may get more stressful.
Investor Paul Meeks warns Wall Street is underestimating the semiconductor shortage. He believes it’ll take years instead of months to get resolved.

“This might be a problem that persists deep into 2023,” the Independent Solutions Wealth Management portfolio manager told “Trading Nation” on Friday.
Meeks, known for running the world’s largest technology fund for Merrill Lynch during the dot-com bubble, expects a painful fallout.
“Some of these companies actually will not be able to ship units. And if they can’t ship units, they might disappoint on their earnings,” he said. “Their stocks are so expensive that they could go down. Not go down a bit, they could go down a lot.”
While corporate America and consumers try to cope with the supply chain frustration, semi stocks are rallying. The VanEck Vectors Semiconductor ETF, which tracks the group, is up 35% over the last six months.
Meeks overweighted chipmakers in early June 2020 — months before supply shortages made front page news. He predicts the stocks have even more room to run.

“I also like semiconductor capital equipment,” he said. “But you have to be a sharpshooter because not only do you have to judge if their products are in favor or out of favor… you also have to figure out who has best executed their supply chains.”

‘There’s not any relief’

“It’s a bummer and unfortunately, there’s not any relief,” said Meeks. “It’ll also hit the top and bottom lines of some of these vendors that are selling those hot Christmas products.”
Meeks views Google as the only FAANG stock he would consider buying with new money right now. He cites benefits to the digital ad industry rebound.
“And, [it] doesn’t have Facebook’s regulatory issues,” he added. “Frankly, the rest of the FAANGs, I would maybe hold if you held them. But I wouldn’t buy them with fresh cash.”
Meeks would also stick with Microsoft.
“It’s obviously very expensive particularly for a company that has never traded at these kind of valuation multiples,” said Meeks. “But they’re doing all the right things. Brilliantly managed.”
Microsoft shares are up 15% over the past month and 51% so far this year.
Disclosure: Meeks owns Apple, Microsoft, Alphabet, Meta Platforms, Amazon, Broadcom Technology, Microchip, Taiwan Semiconductor, Applied Materials.
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The Lordstown Motors Corp. Endurance electric pickup truck is displayed during an unveiling event in Lordstown, Ohio, U.S., on Thursday, June 25, 2020.
Matthew Hatcher | Bloomberg | Getty Images

Check out the companies making headlines in midday trading.
Johnson & Johnson — Shares of the health care giant rose 1.2% after Johnson & Johnson announced a plan to split itself into two companies. The plan, which would take 18 to 24 months, would spin out the company’s consumer products business from its pharmaceutical and medical device business.

Tesla — Tesla fell 2.8% after CEO Elon Musk’s trust on Thursday sold another $687 million in shares, regulatory filings made public Friday revealed. Musk and his trust sold roughly $5 billion worth of stock earlier this week.
Rivian — The newly public electric carmaker’s shares extended their climb Friday, rising 5.6% after rallying more than 22% in the previous session. In the stock’s market debut on Wednesday, it jumped 29%.
Lordstown Motors — The auto start-up’s shares tumbled about 17.5%. The pre-revenue company reported a loss of 54 cents a share for the third quarter, which is slightly narrower than the estimated loss of 59 cents per share, according to Refinitiv. Lordstown said it plans to produce and deliver its Endurance truck in the third quarter of 2022.
WM Technology — Shares of the software company dropped 19.6% on Friday after its third-quarter results missed estimates on the top and bottom lines. WM Technology, which serves the cannabis industry, also issued fourth-quarter guidance that came in below expectations. The company said that competition from “non-licensed channels” was hurting its clients.
Warby Parker — Shares of the eyeglasses maker rose about 9% after reporting quarterly revenue that rose 32% from the same period a year ago. Revenue grew to $137.4 million, and sales were up 45% on a two-year basis.

Hewlett Packard — Shares of Hewlett Packard Enterprise dropped 8.1% after Goldman Sachs downgraded the stock to sell from neutral, citing a weakening IT spending environment in late 2021 and early 2022. The Wall Street firm cut its price target to $14 per share from $16 per share.
Blink Charging — The electric vehicle charging company saw its shares soar 12.6% after beating Wall Street’s revenue expectations. Blink reported $6.4 million in revenue, trouncing estimates of $4.7 million, according to Refinitiv.
Target — Shares of the big-box retailer rose 1.5% after JPMorgan reiterated the stock as overweight ahead of its earnings report next week. The Wall Street firm said the stock is a “clear winner” heading into the holiday season.
Caesars Entertainment — Shares of the casino stock added 4% in midday trading after B Riley Securities initiated coverage of Caesars Entertainment with a buy rating. The Wall Street firm assigned the stock a $191 per share price target.
 — CNBC’s Hannah Miao, Yun Li and Jesse Pound contributed reporting

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Americans quit their jobs in record numbers in September, the Labor Department said Friday in its Job Openings and Labor Turnover report.
Just over 4.4 million people quit, an increase of 164,000 from the prior record in August. The dynamic has been dubbed the Great Resignation.
Workers who voluntarily leave their jobs are generally ineligible for unemployment benefits. There are some exceptions for workers who have good cause, and states may interpret the rules differently.

Joe Raedle | Getty Images

Americans are quitting their jobs in record numbers. However, they likely won’t qualify for unemployment benefits.
Just over 4.4 million people quit in September, an increase of 164,000 from the prior record in August, the Labor Department said Friday.

The quits rate also jumped to 3%, another all-time high. (This measures the number of quits during the month as a percent of total employment.)
The “Great Resignation” may be attributable to many things — pandemic burnout, near-record job openings, higher pay, more workplace flexibility, or a reimagining of one’s career.
Whatever the reason, people who quit their jobs typically can’t rely on unemployment benefits as a financial buffer during their career transition.
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“Generally, if you voluntarily resign your job, you’re not eligible for unemployment,” according to Paul Sonn, state policy program director at the National Employment Law Project. “It’s not something people who quit their jobs can count on.”

There are exceptions to the rule if workers have good reason to quit, Sonn said.
For example, workers who leave a job due to unsafe work conditions or “constructive discharge” (if an employer essentially forces an employee to quit) may qualify for benefits.

States, which administer unemployment insurance, interpret these rules differently.
“It’s something decided on a case-by-case basis,” Sonn said. “You’d need to apply for benefits and explain the situation.”
If states deny benefits, workers may appeal if they feel their voluntary quit constitutes a legitimate claim. The process often takes months, Sonn said.
Congress had expanded the eligibility scenarios during the Covid-19 pandemic. For instance, workers may have qualified for temporary federal unemployment benefits if they quit work for childcare responsibilities. Those federal benefits expired nationally on Labor Day, however.

Of course, the ability to collect unemployment benefits may be of little concern for workers who are able to pick up another job quickly. Many households have also built up savings during the pandemic.
There were 10.4 million job openings in September, according to the Labor Department. That’s the third-highest level on record, behind July (11.1 million) and August (10.6 million), according to data from the Federal Reserve Bank of St. Louis.
Quits have been concentrated in a few sectors of the economy, chiefly those in which most work is in-person or relatively low-paying, according to Nick Bunker, the director of economic research at the Indeed Hiring Lab.  

For example, quits in the manufacturing sector and leisure and hospitality jobs (like bars and restaurants) were up 78% and 43%, respectively, in September versus February 2020, Bunker said. Meanwhile, those in the financial activities sector were up just 5% over that period.
“The ‘Great Resignation’ is more a story about strong demand for workers, rather than a rethink of work among higher-income workers,” Bunker said.

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Check out the companies making headlines before the bell:
Johnson & Johnson — Shares of Johnson & Johnson rose nearly 4% in premarket trading on Friday after announcing plans to split its consumer health business off from its pharmaceutical and medical device operations.

Rivian Automotive — Shares of the newly public electric carmaker continued to rally in premarket trading on Friday after rising more than 22% in Thursday’s session. This followed Wednesday’s market debut where the stock surged 29%. The Amazon- and Ford-backed company already surpassed both Ford and General Motors by market cap, reaching a valuation of $104.9 billion.
Lordstown Motors — Shares of the auto startup plummeted 10% in premarket trading on Friday after the company reported another quarter with no revenue. Lordstown said it plans to produce and deliver its Endurance truck in the third quarter of 2022. The company’s loss per share was narrower than expected in its most recent quarter, according to Refinitiv. BTIG also downgraded Lordstown Motors to neutral from buy.
WM Technology — Software company WM Technology was 13% lower in premarket trading on Friday after missing on the top and bottom lines of its quarterly results. WM Technology’s fourth-quarter guidance also came in under expectations.
Nvidia —Shares of the chip stock fell slightly in premarket trading on Friday after Wedbush downgraded Nvidia to neutral from outperform on valuation. The Wedbush analyst is struggling to justify Nvidia trading 55x the firm’s 2024 numbers.
Hewlett Packard Enterprise — Shares of Hewlett Packard Enterprise ticked lower in premarket trading on Friday after Goldman Sachs downgraded the stock to sell from neutral, citing a weakening IT spending environment in late 2021 and early 2022. The Wall Street firm cut its price target to $14 per share from $16 per share.

Blink Charging — Shares of the electric vehicle charging stock rose 5% in premarket trading on Friday as investors cheered strong third-quarter revenue. The company reported $6.4 million in revenue, well ahead of the $4.7 million expected by analysts, according to Refinitiv.
Caesars Entertainment — Shares of the casino stock rose in premarket trading on Friday after B Riley Securities initiated coverage of Caesars Entertainment with a buy rating and a $191 per share price target.
Warby Parker — Shares of the eyeglasses company fell in premarket trading on Friday after the company reported wider-than-expected losses as direct listing costs offset 32% sales growth. Warby’s net loss for the three-month period ended Sept. 30 widened to $91.1 million, or $1.45 per share, compared with a loss of $41.6 million, or 78 cents a share, a year earlier.

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A top Chinese official gave a rare criticism of the U.S. and Western democracy during a politically significant press conference Friday.
The night before, Chinese President Xi Jinping joined the ranks of Mao Zedong and Deng Xiaoping in becoming the country’s third leader to oversee the adoption of a “historical resolution.”
While criticizing Western political systems, Chinese officials on Friday promoted their country’s own agenda and emphasized new development models under Xi.

Books by and about Chinese President Xi Jinping fill a display at the Museum of the Communist Party of China in Beijing on November 11, 2021.
Noel Celis | AFP | Getty Images

BEIJING — A top Chinese official issued a rare criticism of the U.S. and Western democracy during a high-profile political press conference Friday.
The night before, Chinese President Xi Jinping joined the ranks of Mao Zedong and Deng Xiaoping and became the country’s third leader to oversee the adoption of a “historical resolution” at the close of a widely-watched meeting of the Chinese Communist Party, the sixth plenum of the party’s Central Committee.

Mao led China for decades after the founding of the Chinese Communist Party a century ago. Deng spearheaded sweeping economic reforms four decades ago that reduced the state’s role in the economy and allowed foreign businesses into China.
Chinese officials at Friday’s press conference emphasized how the country would now follow Xi and his vision for a strong CCP-dominated system.
And for more than five minutes, Jiang Jinqua, director of the policy research office of the party’s central committee, criticized the U.S. and Western countries for trying to impose their idea of democracy on China.

The electoral democracy of Western countries are actually democracy ruled by the capital, and they are a game of the rich, not real democracy.

Jiang Jinqua
director, policy research office of the CCP’s central committee

“Democracy is not an exclusive patent of Western countries and even less should it be defined or dictated by Western countries,” Jiang said in Mandarin, according to an official translation.
“The electoral democracy of Western countries are actually democracy ruled by the capital, and they are a game of the rich, not real democracy,” he said.

While China’s foreign diplomats and propaganda arms have made similar criticisms in the past, Jiang’s remarks stood out due to the high-profile political context of the press event, and their specific mention of the U.S.
The U.S. plan to hold a “Summit for Democracy” in December is “an attempt to revitalize Western democracy,” Jiang said. “To convene such a summit against [a] backdrop of loads of problems in Western democracy, … the intention is nothing but bashing other countries and dividing the world.”
He also pointed to public opinion polls showing widespread worries in the U.S. about American democracy, compared with overwhelming Chinese confidence in their own government.

A Pew Research study released Nov. 1 found that 72% of Americans say U.S. democracy used to be a good example for others to follow, but has not been recently. A study led by York University professor Cary Wu found local satisfaction with how the Chinese government handled the coronavirus pandemic.
“The Chinese constantly attack democracies as being not truly representative of the people but rather a cover for elites to keep control,” said Scott Kennedy is senior advisor and Trustee Chair in Chinese Business and Economics at the Center for Strategic and International Studies.
“Certainly there are a lot of Americans disenchanted with our political system,” Kennedy said, without referring to a specific poll. “The irony is that Americans are free to criticize their government. In China, expressing such an opinion could make you a dissident and get you locked up.”

Xi’s new plan for economic development

While criticizing Western political systems, Chinese officials on Friday promoted their country’s own agenda and emphasized new models under Xi.
“Xi is using the past to serve the present and claim the future, by constructing a historical narrative that justifies his personal leadership and policy preferences as he looks to secure a norm-defying third term as leader at the 20th Party Congress next fall,” Neil Thomas, analyst for China and Northeast Asia at Eurasia Group, wrote in a note.
Since Xi rose to the top of central government power in 2012, he has promoted his own state-centric political ideology, commonly known as “Xi Thought.”
The official report on this week’s “historical resolution” cemented Xi’s political leadership by calling him the “principal founder of Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era.”
Economic development has been “front and center” for the CCP, said Han Wenxiu, executive vice minister at the finance and economic affairs office of the party’s central committee. He referred to a meeting held in 1978, just as Deng was beginning to allow foreign businesses into China.
“As socialism with Chinese characteristics enters a new era, development has been given new meanings,” Han said.
“We should cast aside the old development path,” he said, noting that high-quality development is now more important — like recognizing that “green and lush mountains are invaluable assets.” Han maintained that Beijing would still like to “open up” and remain part of the global economy.

China’s plan for businesses

Many foreign investors and businesses have been caught off-guard this year by Beijing’s crackdown on internet technology companies, after-school tutoring businesses and real estate developers.
Tech giants have subsequently tried to show they are in line with Beijing’s effort to pursue “common prosperity,” and focus on moderate wealth for all, rather than for just a few. That means addressing social problems such as high living costs and an impending labor shortage from a rapidly aging population.
Xi’s view is that “ideological challenges are threats to national security,” the Economist Intelligence Unit said in a statement. That will “indicate more assertive efforts to shape ‘ideological education’ across the country, in ways that may adopt an anti-Western tone. Economic reform, however, was barely mentioned, suggesting that the current tilt toward [regulatory] intervention will continue.”

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Chinese officials on Friday did not directly respond to questions on how policy goals might be affected by slowing economic growth.
Han from the economic affairs office said “entrepreneurs have multiple ways and means to contribute to common prosperity, the most basic of which is to operate lawfully and honestly.” Han said stealing from the rich to help the poor in a “Robinhood” approach of forcing donations “would run counter to the original notion of common prosperity.”
He also said that the “right way to contribute to common prosperity” includes paying taxes, performing “social responsibilities,” and treating employees and customers well.

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The Bank of England this week said a U.K. central bank digital currency is unlikely to arrive until at least 2025.
Rising interest in cryptocurrencies has reignited central banks’ digital currency ambitions. But so far, most CBDC projects are moving at a sluggish pace.
Garrick Hileman, head of research at crypto firm Blockchain.com, says CBDCs run the risk of being “massively overhyped and under-delivering.”

China’s digital yuan currency is displayed on a mobile phone in Yichang, Hubei province, China, Feb. 22, 2021.
Costfoto | Barcroft Media | Getty Images

Don’t expect central banks to issue their own digital currencies anytime soon — that was the message from the Bank of England this week.
The U.K. central bank on Tuesday said it was advancing its exploration of central bank digital currencies, or CBDCs, to a consultation stage that’s due to take place next year.

But even if it decides to push ahead with the proposed digital currency, which has been dubbed “Britcoin,” it’s unlikely to arrive until at least 2025, the BOE said. And even then, that’s only if it’s found to be “operationally and technologically robust.”
Anne Boden, CEO of London-based digital bank Starling, said a key question that’s still not been answered is which problem Britcoin is trying to solve. Boden is one of several industry executives providing input to U.K. officials as they explore CBDCs.
“Everything we do in this space has to solve a real problem,” Boden told CNBC last week. “It has to have uptake and needs to be ubiquitous enough in order to provide some real value.”
Rising interest in bitcoin and other cryptocurrencies has reignited central banks’ ambitions to develop their own digital currencies lately.
But so far, most CBDC projects are moving at a sluggish pace. Sweden, which was early to the CBDC game, says it hopes to have a digital version of its krona by 2026.

In China, on the other hand, the central bank is racing ahead with its own CBDC project, rolling out a virtual version of the yuan in trials across several provinces. Experts say the People’s Bank of China is likely to be the first to fully launch a CBDC.
But the PBOC’s digital yuan comes with a number of problems that make it less attractive in Western countries. Critics say it’s too centralized and could be used to boost government surveillance. That’s because, unlike cash, people’s digital transactions can be tracked online.

‘Massively overhyped’

Garrick Hileman, head of research at crypto company Blockchain.com and visiting fellow at the London School of Economics, said talk of central bank-issued digital currencies mimics the hype around blockchain in late 2017, when bitcoin’s price experienced a seismic rally before plunging sharply.
Several major banks had talked up the huge potential for blockchain, the distributed ledger technology behind cryptocurrencies. But they snubbed the idea of bitcoin and other digital coins becoming a mainstream financial phenomenon.
“I think CBDCs right now are running the risk of being massively overhyped and under-delivering,” Hileman said.
“The questions that need to be discussed to design an effective CBDC — like privacy, like surveillance — are things that are way above the paygrade of every central banker.”
There are plenty of issues to be ironed out in the development of CBDCs — not least when it comes to ensuring privacy and avoiding financial censorship.

Bankers also worry CBDCs could undermine their role in the financial system, resulting in the increased risk of a “bank run.” Consumers may flock to place their deposits with central banks directly, rather than keeping their money at the bank.
“Even if you think you’ve got the perfect mouse trap to head off a run from HSBC and Natwest into the Bank of England’s perceived safety, until that’s battle tested we just don’t know,” Hileman said.
Nevertheless, whichever form “Britcoin” and other CBDCs inevitably take, there’s no doubt about the move from analog to digital.
“We’ve been talking about CBDCs for years now,” said Hileman. “This is now firmly on the radar for central banks.”
Boden said she hopes the Bank of England doesn’t wait too long to evaluate the potential for a U.K. CBDC.
“The world is moving on,” she said. “The U.K. has been at the forefront of lots of new payment systems in the past.”
“If something new is going to happen in the space, I very much hope the Bank of England’s there thinking about it soon, rather than later.”

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The 4% rule, a popular strategy to gauge withdrawals from one’s retirement portfolio, won’t work as well in coming decades due to lower projected stock and bond returns, according to a Morningstar paper published Thursday.
The withdrawal rate should instead be 3.3%, the paper said. That can have a big financial impact on retirees.
However, there are many caveats.

MoMo Productions | Stone | Getty Images

Market conditions are pressuring the 4% rule, a popular rule of thumb for retirees to determine how much money they can live on each year without fear of running out later.
Withdrawing money from one’s nest egg is among the most complex financial exercises for households. There are many unknowns — the length of retirement, one’s spending needs (health costs, for example) and investment returns, to name a few.

The 4% rule is meant to yield a consistent stream of annual income, and give seniors a high degree of comfort that their funds will last over a 30-year retirement.
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Simply, the rule says retirees can withdraw 4% of the total value of their investment portfolio in the first year of retirement. The dollar amount increases with inflation (the cost of living) the following year, as it would the year after, and so on.
However, market conditions — namely, lower projected returns for stocks and bonds — don’t seem to be working in retirees’ favor.
Given market expectations, the 4% rule “may no longer be feasible” for seniors, according to a paper published Thursday by researchers at Morningstar. These days, the 4% rule should really be the 3.3% rule, they said.

Though the reduction may sound small, it can have a big impact on retirees’ standard of living.
For example, using the 4% rule, an investor would be able to withdraw $40,000 from a $1 million portfolio in the first year of retirement. However, using the 3% rule, that first-year withdrawal falls to $33,000.
The difference would be more pronounced later in retirement, when accounting for inflation: $75,399 versus $62,205, respectively, in the 30th year, according to a CNBC analysis. (The analysis assumes a 2.21% annual rate of inflation, the average projected by Morningstar over the next three decades.)

Why 3.3%?

Retirees have enjoyed a “trifecta” of positive market developments over the past several decades, according to Christine Benz, the director of personal finance and retirement planning at Morningstar and a co-author of the new report.
Low inflation, low bond yields (which have boosted bond prices) and strong stock returns have helped buoy investment portfolios and safe withdrawal rates, she said.
The dynamic has perhaps lulled near-retirees into a false sense of security, Benz said.
Bonds are “highly unlikely to enjoy strong gains over the next 30 years,” and high stock prices are likely to fall as they revert to the average, according to the report. The analysis concedes that this result is likely though not inevitable.
(While inflation has been historically high in recent months, Morningstar expects it to moderate over the long term.)
Investment returns are especially important in the early years of retirement due to so-called sequence-of-returns risk. Taking too large a withdrawal from one’s nest egg in the first year or years — especially from a portfolio that’s declining in value at the same time — can greatly increase the risk of running out of money later.
That’s because there’s less runway for the portfolio to grow once the investments rebound.

Caveats

Of course, there are ample caveats to this analysis of the 4% rule.
For one, the 4% rule (and the updated 3.3% rule) only consider one’s portfolio investments. It doesn’t account for non-portfolio income sources like Social Security or pensions.
Retirees who delay claiming Social Security to age 70, for example, will get a higher guaranteed monthly income stream and may not need to lean on their investments as much.
Further, the rule of thumb uses conservative assumptions. For example, it uses a 90% probability that seniors won’t run out of money over a 30-year retirement.
Retirees comfortable with more risk (i.e., a lower probability of success) or who think they won’t live into their 90s may be able to safely withdraw larger amounts of money each year. (A 65-year-old today will live another 20 years, on average.)
Perhaps most significantly, the rule assumes one’s spending doesn’t adjust according to market conditions. But that might not be a fair assumption — research shows that seniors generally fluctuate their spending through retirement.
Retirees have a few options in this regard to ensure the longevity of their investments, according to Morningstar. Generally, these call for lesser withdrawals after years of negative portfolio returns.
For example, retirees can forgo inflation adjustments in those years; they may also choose to reduce their typical withdrawal by 10%, and revert to normal once investment returns are again positive.
“There are some simple tweaks you can make,” Benz said. “It doesn’t have to be one giant strategy; it can be a series of these incremental tweaks that can make a difference.”
However, there are tradeoffs to being flexible. Chiefly, making these annual adjustments to spending might mean big swings in one’s standard of living from year to year.

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EVER HAD the feeling that there is a party somewhere that you’re not invited to? It is the same feeling investors have when they have capital sitting in three-month bills or on deposit at a bank. Cash is a safe asset, but a wasting one. The real returns on risky assets have been much greater. True, cash affords options—to buy cheaply when others are selling. But episodes of distressed selling have been fleeting, largely thanks to central banks, which have been liberal in supplying cash in emergencies. Why then should investors incur the opportunity cost of holding it?In its favour, cash is at least now offering a small return, or the prospect of one. Overnight interest rates have risen, notably in Latin America and Eastern Europe. The Bank of England may raise its benchmark interest rate before the year is out. The Federal Reserve may follow at some time next year. But the rate of return in short-term money markets is still below the rate of inflation and is forecast to stay that way. For those seeking returns, holding cash remains a loss-making prospect in real terms.The true appeal of cash as a portfolio asset lies somewhere else. More and more capital is tied up in investments where much of the payoff lies in the distant future. You see this in the huge market capitalisations of a handful of tech companies in America and in the money flooding into private-equity and venture-capital funds. Investors have to wait ever longer to get their money back. In the meantime their portfolios are vulnerable to a sharp rise in interest rates. A simple way to mitigate this risk is to hold more cash.The concept of “duration” is a useful one in this regard. Duration is a measure of a bond’s lifespan. It is related to, but subtly different from, the maturity of a bond. Duration takes into account that some of what is due to bondholders—the annual interest, or “coupon”—is paid out sooner than the principal, which is handed over when the bond matures. The longer you have to wait for coupon and principal payments, the longer the duration. It is also a gauge of how much the price of a bond changes as interest rates shift. The greater a bond’s duration, the more sensitive it is to a rise in interest rates.You can also think of equity investment in duration terms. Take the familiar price-earnings ratio, or PE, the price paid by investors for a given level of stockmarket earnings. The idea is that if a stock has a PE of ten, based on recent earnings, it would take ten years to earn back the outlay of an investor who buys the stock today, assuming earnings stay constant. If the PE is 20, it would take 20 years. The PE is thus a crude measure of the stock’s duration. On this basis, American stocks in aggregate have rarely had a longer duration. The cyclically adjusted price-earnings ratio, a valuation measure popularised by Robert Shiller of Yale University, is now close to 40. It was higher only at the giddy height of the dotcom boom in 1999-2000.The rationale for longer-duration assets is a familiar one. Real long-term interest rates are about as low as they have ever been. As a consequence investment returns even in the distant future, once discounted, have a high value today. It is not just stocks. Property is valued at a steep price relative to the stream of future rents. Investors are piling into private-equity and venture-capital funds that won’t pay out for a decade or more. Everyone, it seems, is long duration. But with longer duration comes a greater risk that unexpectedly aggressive interest-rate rises will lead to a collapse in asset values.A typical investment portfolio of stocks, bonds and property is vulnerable to this risk. There are not too many good ways to hedge it. Buying insurance in the options market against a stockmarket crash is expensive and fiddly.This is where cash comes in. Cash is by definition a short-duration asset. Were interest rates to go up sharply, cash holders would get the benefit quickly even as other assets suffer. So as the duration of your portfolio rises, it makes sense to raise your cash holdings too. By precisely how much will depend, as ever, on your risk appetite. Just as you are advised to sell down your stocks to the level where a night’s rest is assured, you might also build up your cash holdings to the sleeping point.Of course, such a strategy comes with an opportunity cost. As long as asset markets continue to boom, cash will be a drag on your portfolio. So be it. Missing out on some returns is the price you pay for mitigating duration risk.For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter.This article appeared in the Finance & economics section of the print edition under the headline “For the duration” More