For the past two years, investors have been clinging to the hope of a pivot—just one more rate hike, then the easing begins. It hasn’t happened. And it might not. Services inflation remains stubborn, wage growth continues to rise, and the Fed is constrained by issues of credibility and political pressures. Markets are still dancing to the tune of rate-cut optimism, but the music may have already stopped.

What if the soft landing is a myth? What if the current situation isn’t a cycle but a new regime?

We may be entering a structurally high-rate, high-cost era with no off-ramp. If that’s the case, portfolios built on duration, debt, and discount-rate dreams could be dangerously misaligned. It's not just about earnings anymore, it’s about survivability in a world where money isn’t cheap and inflation won’t fade.

The Inflation That Won’t Quit

Investors may feel comforted by cooling headline CPI, but it’s a false sense of security. The real battle is in core services inflation, and that war is far from over.

Shelter, healthcare, insurance, and wages—these are the sticky categories that don’t respond quickly to rate hikes. While goods prices have eased as supply chains normalized, services inflation remains embedded. Fed Chair Jerome Powell himself admitted, “the last mile is the hardest.” That mile, it turns out, is paved with structural realities: an aging population, labor shortages, rising healthcare costs, and deglobalization.

Examine the data: the Consumer Price Index (CPI) for services, excluding shelter, is currently above 4% in the U.S., which is double the Federal Reserve’s target. Wage growth continues to outpace productivity in both the U.S. and Europe, paving the way for long-term inflationary pressure. These aren’t blips—they’re trends.

The takeaway? Inflation is not merely a cyclical phenomenon. It’s a structural condition that monetary policy alone can’t fix. Betting on rate cuts while services inflation persists is like betting against gravity.

The Myth Of The Imminent Pivot

For over a year, markets have bet—wrongly—on an imminent Fed pivot. Futures traders continue to price in multiple cuts, despite the Fed’s consistent messaging that inflation remains enemy number one.

This belief is rooted in recency bias. Investors expect a replay of 2008 or 2020, where stress equals stimulus. But the present isn’t the same game. Real yields are still high, and the Fed is cornered. Cut rates too soon, and inflation roars back. If you remain unchanged, the economic hardship will intensify. There is no simple way out.

In April 2024, Chair Powell made it obvious: “We are prepared to keep rates higher for longer if needed.” This isn't a sign that the Fed is nearing completion. It’s a warning.

The reality? Investors eagerly anticipate rate cuts, akin to children anticipating recess, yet the school bells remain unrung. The Fed's credibility and the persistence of inflation limit its options. The issue no longer concerns soft landings. It’s about endurance in a high-rate regime.

The pivot fantasy needs to end—before portfolios built on wishful thinking collapse under the weight of reality.

A New Regime Of High Rates

Investors hoping for a return to the low-rate norm of the 2010s may be fighting yesterday’s war. We’re not just in a prolonged tightening cycle, we’re staring down a structural shift. This new regime will see elevated rates as the norm rather than the exception.

Deglobalization has reversed decades of disinflationary tailwinds. Supply chains are coming home—not because it’s cheaper, but because it’s strategic. That means redundancy, not efficiency. Labor power is rising, with union wins across logistics, autos, and airlines. However, the necessary energy transition requires a significant amount of capital, which may lead to inflationary consequences. In the meantime, governments are not taking any steps to slow down the energy transition. Fiscal policy remains loose. From industrial policy to military spending to clean energy subsidies, the money is flowing—and so are the deficits.

Look at Japan and Germany. Once bastions of deflation, both are now wrestling with sticky inflation. That’s not noise. It’s signal.

The old playbook—where globalization and tech kept prices down—is obsolete. The change isn’t a cyclical bump. It’s a macro regime shift. And portfolios built for low inflation and low rates may be structurally misaligned for what’s next.

What This Means For Markets

If we are in a structurally high-rate regime, the implications for markets are brutal—and uneven. Assets with a high duration are the first to suffer. Long-dated bonds, high-growth tech stocks, and richly valued sectors suffer the most when discount rates stay elevated. Valuations compress not because companies fail but because the math of future cash flows changes. Hope gets expensive.

Particularly vulnerable are companies that relied on inexpensive capital. Low cash flow, high leverage, and long payback periods were viable in a zero-rate world. Now, they’re liabilities. Balance sheet strength matters again.

Even passive investors aren’t immune. Broad ETFs—overweight mega-cap tech and rate-sensitive darlings—are more vulnerable than they seem. Take ARKK. Despite AI buzz, it’s underperformed because rate pressure is overpowering the narrative.

Expectations form the foundation of markets. If the rate-cut hope dies, so might the rally. The structural backdrop matters more than the latest headline. Investors tend to overlook the potential consequences of a regime shift.

What Investors Should Do Now

If we truly are entering a high-rate, high-cost regime, investors need to recalibrate—not hope for the old playbook to return. That starts with a brutally honest reassessment: Are your allocations built on reality or on rate-cut fantasy?

• Focus shifts from duration to discipline. Prioritize companies with pricing power, fortress balance sheets, and stable cash flows. These companies not only survive in a higher-rate world, but they also thrive and grow during it.
• Please consider reevaluating your fixed income exposure. Shorter-duration credit, floating-rate debt, and high-quality yield can provide ballast without rate-risk drag. On the equity side, look beyond growth-at-any-price. Industrial names, commodity plays, and real asset operators are better positioned when capital costs stay elevated.
• Identify opportunities that are not dependent on macro timing, as this is where edge matters. Spinoffs, distressed plays, and special situations offer alpha through dislocation, not dependence on dovish pivots.

If the tide of easy money turns, precision, not participation, will produce alpha.

Final Thoughts

The Fed may never say it outright—but the fight against inflation might already be over. Services inflation hasn’t budged, wages are sticky, and structural pressures, from labor to energy,—aren’t going away. Investors clinging to a fantasy of imminent cuts are not managing risk—they’re indulging in it.

This isn’t about sounding alarms. It’s about protecting capital. The most dangerous portfolio today isn’t one that lags—it’s one built for a world that no longer exists.

If you’re still positioned for cheap money, you’re misaligned with the regime we’re already in.

If we've stepped into a new era, don't adhere to outdated norms. In a high-rate world, survival favors the prepared—not the hopeful.