Over the last 40 years, a lot of investment decisions were made under the same basic conditions: rates were trending down, asset prices were going up, and capital was cheap and easy to find. That shaped how people approached deals, how portfolios were built, and what risks made sense to take.

Market dynamics have moved in a new direction. According to Ray Dalio’s long-term debt cycle framework, economies go through multi-decade periods of falling interest rates, rising debt levels, and financial engineering. We are now on the back end phase of that cycle—where debt burdens are high, inflation has returned, and interest rates are being structurally reset to restore balance. With higher rates and a reset in the cost of capital, many of the assumptions that worked in the past 40 years may not apply in the same way today. The current environment seems to call for a different approach.

A 40-Year Period of Declining Rates

From 1980 to 2021, the Federal Funds Rate declined from over 19% to effectively 0%. Falling rates acted as a tailwind for both stocks and bonds over that period.

Declining rates meant:

• Bond prices steadily appreciated as yields fell.
• Real estate cap rates compressed, driving up valuations.
• Companies could borrow at increasingly lower costs, pushing up equity valuations and fueling growth.
• Discount rates used in financial models declined, raising the present value of future cash flows.

It was an environment that rewarded risk—especially when investors were willing to take on leverage, illiquidity, or complexity. From 1980 to 2021, falling interest rates supported a long run of strong returns across both stocks and bonds. It was a stretch where the traditional 60/40portfolio did well, with returns above long-term averages and relatively low volatility. That kind of environment made it easier for a wide range of asset classes to perform at the same time. With cash and high-grade bonds offering relatively little, there was a strong incentive to move further out on the risk spectrum.

A Change in the Cost of Capital

The combination of pandemic-era stimulus and the inflation that followed led to a shift in interest rate policy. Starting in 2022, the Fed raised interest rates from 0% to over 5%—one of the fastest hiking cycles in modern history.

For the first time in over a decade:

• Cash     yields over 5% became a real alternative.
• The 10-year Treasury yield climbed to levels not seen since 2007.
• Investment-grade     and high-yield credit began offering returns comparable to equities, but     with contractual cash flows.
• The cost of borrowing for companies, real estate, and private equity deals     rose meaningfully—reducing leverage-fueled return strategies.
• Equity valuations that made sense at a 0% discount rate look very different at 5% putting deals that relied on low-cost debt to juice returns are under pressure

As Ray Dalio explains, when the long-term debt cycle peaks, monetary policy becomes less effective, and interest rates must rise to counter inflation and rebalance the system. That makes capital scarcer and reprices assets across the board—a dynamic that seems to be the case now. In other words, the same asset, with the same fundamentals, may now be worth less purely because the discount rate is higher. “Interest rates are to asset prices what gravity is to matter. The higher they are, the greater the downward force on valuations.”
—Warren Buffett

What worked in the past might not translate as well today, especially when it comes to pricing risk and return.

Fixed Income Has Become More Practical Again

In the low-rate era, traditional fixed income had a limited role. Core bond funds often delivered 2-3% returns, and institutions were pushed into alternatives to meet return targets.

That dynamic has changed. Today:

• High-yield bonds yield over 7% on average. With the private market vehicles being     over 10%.
• Senior secured loans, CLOs, and asset-backed debt are offering 9–11% returns with strong investor protections.
• Risk-free Treasuries now compete with equities on yield alone.

For the first time in a while, it's possible to meet return targets with contractual cash flows and moderate risk.

A Rebalance Toward Cash Flow and Hard Assets

With higher financing costs and pressure on valuation multiples, there’s been more focus on assets that generate steady cash flow and don’t require a lot of reinvestment. That’s showing up in how investors are evaluating opportunities—there seems to be more weight given to:

• The margin of safety in entry pricing
• Downside protection in structure and collateral
• The consistency and predictability of cash flows
• The value of yield-based returns over appreciation-based returns
 

In this environment, real assets—like income-producing real estate, alternative assets, and specialty finance—play a bigger role in portfolio construction. These assets often provide inflation protection, yield stability, and less correlation to public market sentiment. During inflationary or tightening periods historically—such as the 1970s—real assets and income-generating investments like land, hard assets, and private credit significantly outperformed growth-oriented equities in both return and volatility-adjusted terms.

Closing

The fundamentals haven’t really changed. Thoughtful underwriting, patient capital, and alignment between investor and asset still matter as much as ever. What has shifted is how to apply those principles.

Today’s market seems to reward a more disciplined approach: focusing on capital preservation, underwriting well, looking for opportunities based on absolute value rather than momentum, and taking advantage of higher base rates and wider spreads. “The intelligent investor is a realist who sells to optimists and buys from pessimists.”
—Benjamin Graham

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