WSJ – Daily Shot: Developed World Interest Rate by Term 9/5/19
WSJ – Daily Shot: Statista – World’s Biggest Human Migrations 9/5/19
WSJ – Daily Shot: Developed World Interest Rate by Term 9/5/19
WSJ – Daily Shot: Statista – World’s Biggest Human Migrations 9/5/19
A thought experiment – what if low-to-negative interest rates are here to stay…
But first, Disney is crushing it at the box office.
A symptom of low / negative interest rates…
UBS plans to levy a negative interest rate on wealthy clients who deposit more than SFr2m (USD $2M) with its Swiss bank, as lenders hunker down for a period of ultra-loose monetary policy.
Several banks in Switzerland and the eurozone already pass on the cost of negative official rates to corporate depositors, although most large players have refrained from doing so with individual clients.
But with policymakers expected to adopt a “lower for longer” stance for the foreseeable future, UBS Switzerland will from November charge 0.75% a year on individual cash balances above SFr2m, according to three people briefed on the plans.
The move underscores how banks in Europe and the US are scrambling to prepare for a protracted spell of lower rates that threatens their profitability, having previously wagered that central bankers would tighten monetary policy.
“We assume that this period of low interest rates will last even longer and that banks will continue to have to pay negative interest rates on customer deposits at central banks,” UBS said. “Following similar moves by a number of other banks here in Switzerland, we confirm that we’ve decided to adjust cash deposit fees for Swiss francs held in Switzerland.”
The move comes as Credit Suisse, UBS’s main rival, said on Wednesday it was also thinking about imposing a levy on some wealthy clients.
And now an extremely insightful piece from Robin Harding of the Financial Times. This one is in its entirety with some emphasis made in bold (mine).
This will be a discomforting, defining week for the global economy. That is not because the US Federal Reserve is set to cut interest rates. Rather it is because of the strikingly low level of rates from which the Fed will start: a range of just 2.25% to 2.5%.
After more than a decade of economic expansion, and despite everything from tariffs to tax cuts, it seems this is as high as US interest rates go. Meanwhile, the European Central Bank is debating whether to reduce its negative rate still further. Until this month, it was possible to imagine that pre-financial crisis levels of 4% to 5% might eventually return. No longer.
According to their own projections, Fed officials believe rates will settle at 2.5% in the long run. Subtract their 2% inflation target and the real reward for capital is going to be a miserable 0.5%. The equivalent rate in Europe and Japan will almost certainly be much lower. Such low levels of interest rates are a profound change from the past. (The federal funds rate was 6.5%, and the real rate was about 4% as recently as 2000.) Although interest rates touch almost every aspect of economic life, the developed world remains deep in denial about the consequences. Here are eight themes for investors and policymakers to ponder.
First, there is an intimate link between long-run interest rates and long-run economic growth. Perhaps capital is less relevant to the digital economy, but for interest rates to max out at such low levels sends an alarming signal about the prospects for future expansion.
Second, monetary policy is broken. In 2008-09, the Fed cut rates by 5 percentage points and it was not enough. Today it has far less room to respond to a recession. The Bank of Japan, which made no move on Tuesday, has all but given up trying to hit its 2% inflation target. The ECB is in danger of going the same way. The world is dismally unprepared for a downturn: two of the world’s most influential central banks may start the next recession with their policy rate already below zero.
Third, if monetary policy is broken, fiscal policy must step in. That means either governments must approve higher spending and tax cuts in response to a recession or else give the central bank a fiscal tool in the form of “helicopter money”, essentially printing money to spend or distribute to the public. Alternatively, governments could set higher inflation targets and use fiscal policy to reach them now. That would give their central banks more room to cut when they need it.
Fourth, lower interest rates make debt more sustainable. This is particularly true for public debt, because countries actually borrow at these low risk-free rates, and somewhat true for private debt. For many countries, it makes sense to borrow more in order to invest. Predictions of financial crisis based on past levels of debt-to-gross domestic product are likely to be misleading.
Fifth, capital stock should rise relative to output. Investments that were once unprofitable now make sense: road upgrades to save a few minutes of time; expensive, niche drugs to help a few hundred people; or extra years of study to earn a graduate degree. Such projects may feel irrational. They are not.
Sixth, any asset in fixed supply is now more valuable, because its future cash flows can be discounted at a lower rate. A monopoly supplier of water or electricity, land in a city center or the back catalogue of Disney: the capital value of these assets must rise, so their yield matches the lower interest rates. This trend is related to recent movements in wealth inequality. It also puts investors at risk of identifying financial bubbles that do not actually exist. One vital policy response would be to slash the return on capital allowed to utilities.
Seventh, demand for housing will rise. It is, after all, the main capital asset that most people use. There are two potential outcomes. Where it is possible to build, permanently lower interest rates will trigger an increase in the housing stock. If it is not possible to build, then houses will behave like assets in fixed supply, and soar in price. Thus falling interest rates make planning and zoning rules a crucial economic issue.
Eighth, low interest rates make it harder to save. In particular, they make it harder to save for a pension, and harder to live off whatever capital accumulates. This fact has been obscured by the one-off rise in price for scarce assets, many of which are owned by pension funds. But future returns are likely to fall. The result will force workers to accept some combination of later retirement, higher taxes, bigger pension contributions or lower incomes in old age.
It is possible that this bout of low interest rates will end. Perhaps the Fed is mistaken and it will have to raise rates sharply in the future. Perhaps a burst of technological progress will raise growth and boost demand for capital.
But no one can choose to make that happen: this is not some perverse plot by Fed chair Jay Powell and ECB president Mario Draghi to make life miserable for the world’s savers. The long-run real interest rate balances the desire to save and demand to invest. Central banks are its servants not its masters.
The trend towards lower real interest rates has lasted for decades and is as likely to continue as to reverse. With central banks moving to ease, it is time to stop waiting for rates to recover and face the world as we find it.
It’s hard to wrap your head around just how low U.S. interest and bond yields are—still are—a decade after the Great Recession ended. Year after year, prognosticators said that rates were bound to go back up soon: Just be ready. That exercise has proved to be like waiting for Godot.
Thirty-year mortgage rates are a fraction of long-run averages, and companies too are paying very little to borrow. All that cheap money has been helping the economy along. On the other side of the ledger, bank depositors are getting paid only a fraction of 1% on their savings.
The longevity of low rates has upended long-standing assumptions about money and reshaped a generation of investors, traders, savers, and policymakers. The Federal Reserve has tried to push the U.S. into a higher-rate regime, raising rates nine times since 2015, when the key short-term rate was near zero. But now the central bank appears ready to reverse course and start cutting again when it meets at the end of July.
Anne Walsh, chief investment officer of fixed income at Guggenheim Partners, says there’s been “a paradigm shift of epic proportion for investors.” Not only are short-term rates low, but long-dated bond rates are minuscule, too, suggesting that investors see little likelihood of rates—and the economic conditions they reflect—changing anytime soon.
Borrowers of all kinds have been clear benefactors of this sea change, with many nations and companies locking in low rates for as long as a century. Belgium and Ireland have sold 100-year bonds, as did Austria this year at a yield of 1.171%. In 2015, Microsoft Corp. sold 40-year bonds and the University of California issued 100-year debt. Subdued rates have also buffered the U.S. Treasury from rising interest costs on the federal debt.
Individuals have had to get used to earning paltry rates. The national average rate on savings accounts is 0.10%, little changed from four years ago and down from 0.30% in 2009, according to data from Bankrate.com. In 2000, well before the financial crisis, the rate was 1.73%.
The problem is the same for institutions that manage savings on behalf of others. Pension funds, overseeing trillions in retirees’ future cash, have been ratcheting down return expectations. The 30-year Treasury bond, a favored debt security, yields about 2.5%—compared with an average 6.5% since the 1970s. Even a record rise in stock prices hasn’t solved the low-return problem for pension funds, because many of them cut their allocations to equities after the financial crisis.
Where low rates really bite isn’t in current returns but in the future gains investors can reasonably expect. Interest rates set a kind of baseline for the return on all assets. As they fall, bond values rise and stocks often do, too. But once rates have settled at or near rock bottom, there’s less room for that kind of price appreciation.
While some Fed officials wish they could get back to more-normal rates, so they have more room to ease again in the future if they need to fight a downturn or fresh financial crisis, they seem to have their hands tied. For all the problems low rates may cause, policymakers see them as a stimulant to growth. Although unemployment rates are very low, the economy took an agonizingly long time to recover from the financial crisis. And now a slowdown in global growth and headwinds from Trump’s trade war have made risks to U.S. output too strong to ignore.
The surprising persistence of low rates has even quietly reordered the hierarchy on Wall Street. Hedge fund managers may still be glamorous on shows like Billions, but in real life they’ve had to fight to retain clients. Partly that’s because many hedge fund managers thrive on volatility, and in a world where the dreaded spike in interest rates has never arrived, there’s been too little of that for them. The long fall in rates has made it easier so far to earn money with simple investments such as stock and bond index funds. Meanwhile, cheap financing costs and rising asset values have been a boon for private equity firms. Investors have committed about $4 trillion to them in the last decade, according to data from research firm Preqin Ltd.
In 2009, bond powerhouse Pacific Investment Management Co. saw all this coming, when they dubbed their multiyear investment outlook “the new normal” and predicted lower long-term yields. They saw the same issues the Fed and central bankers around the world are grappling with now: slow growth, a combination of technological innovation and low-cost global labor that eases inflationary pressure, and a glut of savings as the populations of rich countries age. Looking ahead, with many of those 2009 factors remaining, “the new wrinkle is concern around global trade and countries looking more inward,” Pimco Group Chief Investment Officer Dan Ivascyn says. “Yields can absolutely go a lot lower.”
Trying a new approach. Thoughts?
Trade War. Chinese Aviation. Japan Sex Industry. Facebook. Investment Management. Interest Rates. Solar Installations. US Treasuries. Shipping. Ireland. Britain. Former presidents Park and Lula.
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