Permanently low interest rates?

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Augustus
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Permanently low interest rates?

Post by Augustus » Thu Aug 01, 2019 6:28 pm

Does anyone know what the Fed is doing? I read that they stopped quantitative tightening early as well as lowering rates already. I also recall reading yellen predicting that there would never be another financial crisis in her lifetime. I would have believed the yellen's statement to be mere sales puffery until seeing the Fed reverse course on interest rates and QT. Do they really think they have tamed financial crises? Are low interest rates and lots of debt the new normal?

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Re: Permanently low interest rates?

Post by unemployable » Thu Aug 01, 2019 7:27 pm

Augustus wrote:
Thu Aug 01, 2019 6:28 pm
Are low interest rates and lots of debt the new normal?
Maybe. US rates are low because at least they're not negative and our economy isn't the value trap most of the rest of the so-called civilized world is.

I remember people being worried about "crowding out" of interest rates with the US national debt. Now everyone's crowing in, because these days it's nice to have a plus sign in front of your government bond rate.

Riggerjack
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Re: Permanently low interest rates?

Post by Riggerjack » Thu Aug 01, 2019 8:54 pm

We are at the longest interval between recessions in US history. So we will know when that interval ends. Either we will face a recession, with very little Keynesian ammunition, or we will never again see a recession.

I've been wrong about the Fed and the results of QE for years and years, now. But they have navigated this narrow straight far better than I thought possible. Maybe we are in a new recession less world, a world where debt can fuel asset prices upward, forever.

Of course, that just translates to lower and lower returns for accumulators... But it seems popular.

bigato
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Re: Permanently low interest rates?

Post by bigato » Thu Aug 01, 2019 9:46 pm

Keep in mind that there are two components to their actions: the actual movement they do with the interest rate, and the signaling of their future intentions. The apparent confusion, is all on purpose off course. I mean, what *else* they could do at this point? Raising rates when a global recession is knocking on the door? On the other side, lowering rates would only have a limited effect on this climate. If they lower it faster, they run out of powder too soon. If they signal further lowering, they commit to spending the powder fast. The market would get frustrated if they don't and this is a dangerous moment for this to happen. If they signal they won't decrease the taxes, it will also be bad. If they signal they will raise them, it will be bad. There's nowhere else to go except to create confusion. It's so logical that I suspect there's a powerful AI system guiding this. I mean, it is 2019, why not? Also, there's only so much the Fed can do about this. It's mostly about navigating the tide. You don't control how high it will get, when it will break, etc. I find it a bit surprising that folks way smarter than me get surprised by this kind of bullshit, maybe I'm way dumber than I think and am just getting it all wrong? I mean, when some indicator comes out bad and then the markets climb in anticipation for interest rate cuts, it is working *exactly* as intended, why the surprise?

The Old Man
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Re: Permanently low interest rates?

Post by The Old Man » Fri Aug 02, 2019 4:59 am

Permanently low interest rates?

Are you channeling Irving Fisher? Joseph Schumpeter described him as the greatest economist the USA has ever produced.
Irving Fisher predicted, nine days before the crash of 1929, that stock prices had "reached what looks like a permanently high plateau."

Augustus
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Re: Permanently low interest rates?

Post by Augustus » Fri Aug 02, 2019 12:05 pm

The Old Man wrote:
Fri Aug 02, 2019 4:59 am
Are you channeling Irving Fisher?
That's kind of what prompted my question, I had always assumed that rates were artificially low since 2008 and that the fed would raise them back to normal ranges. I'm starting to wonder now if the Fed believes they're trapped and can no longer raise rates, because doing so would tank asset prices predicated on low monthly payments.

@bigato asked the question, what are their options. One option was simply doing nothing, they didn't do that. If they can't raise rates now, because a global recession is knocking on the door (when unemployment is at historical lows, and asset prices are at historical highs), when can they raise rates? They can't raise them in a recession, nor can they raise them during a recovery. It seems like they've painted themselves into a corner.

The rate increases made me happy because I thought things were finally getting back to normal, but perhaps this is the new normal, I don't know.

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Re: Permanently low interest rates?

Post by jacob » Fri Aug 02, 2019 2:09 pm


CS
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Re: Permanently low interest rates?

Post by CS » Fri Aug 02, 2019 9:04 pm

For that whole thing to end up on gold and other tangibles made it surprising to find the All Weather Portfolio he kept mentioning is only 8% gold and 8% commodities. Also, NO cash and 55% (government?) bonds.

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Re: Permanently low interest rates?

Post by bigato » Sat Aug 03, 2019 11:02 am

Well 8+8 is not far from 20 that is the percentage of gold in the golden butterfly portfolio. Also it is not meant to perform the best in every situation. For that, they have their "Pure Alpha" fund, which presumably would take more opinionated instances like say, 40% gold now.

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Re: Permanently low interest rates?

Post by bigato » Sat Aug 03, 2019 11:04 am

Also, most people in the us would keep their cash portion in short-term government bonds anyway (t-bills) that are seem as being liquid and safe

giskard
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Re: Permanently low interest rates?

Post by giskard » Sun Aug 04, 2019 10:35 pm

I think they will be cutting rates back to zero. The day after interest rates get cut, Trump drops a twitter bomb which will end up necessitating another cut. Trump can do it every time, after every single fed meeting until he the election. By then we are either at zero due to his manipulation or we are in a recession and we are at zero anyway and the fed is expanding the balance sheet again. Will they ever be able "normalize" rates? Doubtful with the debt and deficits as high as they are.

CS
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Re: Permanently low interest rates?

Post by CS » Mon Aug 05, 2019 8:10 am

@bigato
They didn't mention the alpha fund. I thought it rather poorly done to have the be the thrust and final conclusion, while mentioning that fund twice, only to find out what that fund really is (also if the bonds are government bonds, then there is whole other issue of insolvency, also brought up by the same article).

Are commodities really so out of fashion that to even have 16% is seen as radical?

I hear you about 16% and 20% not being that far apart - yet another reason I am not fully in the Golden Butterfly. Even if I do go that route - that SCV would be 'extra' money, i.e. money I could afford to lose. I think of it as on top of my main permanent portfolio. And even then, worse case, I plan on only having a quarter of that left. Hence the need for other sources of income/flexibility.

classical_Liberal
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Re: Permanently low interest rates?

Post by classical_Liberal » Mon Aug 05, 2019 9:46 am

Part of the risk associated with low rates is the spill over effect into the public equity markets. Low rates tend to push more investors into equities, couple that with heavy institutional investing, high levels of private indexers saving for retirement, the influx of capital from QE, etc. Suddenly we have a public equity investment situation with perma-elevated valuations (say, new mean CAPE 25). IOW, stocks as a whole become a bit less volatile, with much lower than average returns. The real risk reward is shifted into investments like VC and angel investing. Which have significantly more barriers to entry, much like stock investing had in the past.

An investor who previously invested via noncoorlators like GB or PP, relied mostly on equities for growth, the noncoorlators would kick in with high levels of stock volatility. Still they probably managed to eek out 1-3% real from treasuries, cash, and gold over the long term. However, in a future situation of perma-low rates, those returns end up much less, say 0-1%. Then, the less volatile, highly valued public equity market only returns 3-4% (due to the structural changes above), from a historical 7%. In this situation, it's easy to see how a stock allocation, which is too low under new norms, can make a portfolio suffer. The impact is tripled up because noncoorletors are less useful with less low end volatility, AND they are subject to lower yields themselves.

This is why I'm concerned with dropping my equities position below 50%ish.

Edit: Also consider with GB, low rates tend to favor growth companies vs value, as they are the ones who tend to take more advantage of leverage. Hence a the value advantage may be lost in the mix as well.

CS
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Re: Permanently low interest rates?

Post by CS » Mon Aug 05, 2019 10:55 am

classical_Liberal wrote:
Mon Aug 05, 2019 9:46 am
An investor who previously invested via noncoorlators like GB or PP, relied mostly on equities for growth, the noncoorlators would kick in with high levels of stock volatility.
Not necessarily true for the PP. There is a reason why stocks are only 25% - and the book has examples of stocks have no returns for a decade or more and the portfolio doing fine. It is not a growth portfolio - it is a I'll-never-be-left-with-nothing portfolio. High stock allocation cannot offer that.

If the US defaults, that is where the having gold elsewhere in the world comes in handy. Of course the US government is doing their damndest to make sure that is impossible or difficult.

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Re: Permanently low interest rates?

Post by classical_Liberal » Mon Aug 05, 2019 3:12 pm

@CS
I'm not saying the PP is a bad portfolio, god knows I wish I had it today :oops: .

What I am saying is that the PP functioned well in the past because in times of very poor stock performance lots of deflation, stagflation, and fed monetary policy accompanied the poor performance. This helped the other asset classes out perform. I think that will still happen to some degree. But rates can only go so far negative, deflation hasn't really existed since end of Bretton Woods (and resource depletion will likely add to this), and stocks may not fluctuate as much as in the past, meaning rebalancing at the bottom has less impact. All of this coupled with potentially lower equity returns in the subsequent "boom" years means overall returns could be quite a bit lower. This makes me worry that having only 25% equities in "growth" years is not enough to sustain previous WR's on portfolios like the PP.

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Re: Permanently low interest rates?

Post by Seppia » Tue Aug 06, 2019 1:24 am

https://www.bloomberg.com/news/articles ... anipulator

The unintentional comedy is high

“Mnuchin said in June that China was intervening in currency markets to prop up the yuan, and warned it could be designated a manipulator if it stopped.”

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Re: Permanently low interest rates?

Post by IlliniDave » Tue Aug 06, 2019 7:31 am

I admit I don't grok all the implications of currency devaluation (presumably it was a retaliatory move against the US). I understand that China is in some ways a bad actor when it comes to international commerce, but I do sometimes wonder if there couldn't have been a more subtle way to rein them in, even though we've been trying that for almost 30 years with no efficacy.

Seems like Trump tweets away a disheartening fraction of my retirement every couple months. Good thing I'm an over-saver.

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Re: Permanently low interest rates?

Post by jacob » Tue Aug 06, 2019 10:28 am

@iDave/Seppia - Yeah, the status quo is such that the US buys a lot of stuff from China in return for USD (think of it as US buying stuff and selling USD). Normally, China would take these USD and buy US treasuries (thus selling the USD right back to the US). This would be exchange-rate neutral to the first order. However, should China decide to stop buying treasuries or just slow down the buying of treasuries (while continuing the sale of stuff at the same rate), China would then accumulate USD. In the grand scheme of things, this will depreciate the CNY relative to the USD. This in turn would render Chinese exports cheaper and boost the Chinese export industries. This is to the benefit of Chinese workers and US consumers. And it hurts Chinese consumers and US workers(*).

A more direct way of currency manipulation would be for China's central bank to simply sell CNY and buy USD directly.

To raise the relative value of the CNY (apparently Mnuchin's problem last month), merely flip the lever at do the opposite relatively speaking.

This problem exists everywhere one economy is more efficient than the other. For example, in the EU, Germany plays the role of China and Greece et al. plays/played the role of the US. Germany is a highly productive country and tends to make more stuff than anyone else. Before the monetary union, to buy German BMWs from Greece, you'd need to sell Drachmas and buy Marks (depressing the Drachmas and boosting the Mark) so you could pay for your new car (with DM). As a result, the DM was very strong. This in turn made BMWs even more expensive and thus demand decreased outside of Germany. This is how it's "supposed to work" with floating currencies. However, with the introduction of the EUR, both Germany and Greece et al. were now on the same currency. The only solution for this was for less productive economies to make up the shortfall with debt (and they could borrow at EU's combined credit rating too in a sense). As a result the PIIGS came to owe a lot of money to Germany et al. And there you have the problem of the EU economy since 2011 or so.

And this is essentially the same problem plaguing the US vs China relations and to some degree US vs Japan and US vs SK.

(*) This is a HUGE conflict of interest that tends to result in a political shitshow. Therein lies the challenge for US politicians. How do you appease both US workers and US consumers who are often the same person? Answer: by a combination of gaslighting and divide and conquer. You can see how China is fighting back against this by deliberately targeting US politicians at the congressional district level in terms of where those US workers work. E.g. a specific airplane part might only be made in district X, so China makes a "general" rule that's allowed under WTO which just happens to target just that part made in district X.

To fight back at China, the US would need to buy CNY from any and all central banks in the world that hold them and who are willing to take USD in return. The US would have to do this in direct proportional volume to what China is doing (or refraining from doing)(**). This would raise CNY and lower USD ... but this in turn would hurt US consumers in general because they buy a lot of stuff from China and would see prices go up insofar distributors and companies don't absorb it. I think this is why Trump is trying to avoid ... because while currency manipulation and targeting is complicated, having to pay more for stuff at Walmart after whenever he tweets is something everybody understands.

(**) If a central bank does that in proportion to their trade imbalance as opposed to what the opposing central bank does, that is essentially what a currency peg is. China did that for a long time. Currency pegs are mainly intended to provide exchange rate stability and works well if the imbalance fluctuates around zero .. like sometimes there's more import than export and other times it's the other way around. It's when the imbalance becomes chronic, like it is with China, that the peg becomes problematic (essentially a form of mercantilism).

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Re: Permanently low interest rates?

Post by Seppia » Thu Aug 08, 2019 2:42 am

Thanks Jacob for the great read.

https://www.bloomberg.com/opinion/artic ... ium-europe

Now we can lend money to Germany for 30 years and get LESS money back, or, in alternative, lend it to Austria for 100 years and make a handful (0,75%).
Sign me up!

CS
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Re: Permanently low interest rates?

Post by CS » Sat Aug 17, 2019 9:46 am

classical_Liberal wrote:
Mon Aug 05, 2019 3:12 pm
@CS
I'm not saying the PP is a bad portfolio, god knows I wish I had it today :oops: .

What I am saying is that the PP functioned well in the past because in times of very poor stock performance lots of deflation, stagflation, and fed monetary policy accompanied the poor performance. This helped the other asset classes out perform. I think that will still happen to some degree. But rates can only go so far negative, deflation hasn't really existed since end of Bretton Woods (and resource depletion will likely add to this), and stocks may not fluctuate as much as in the past, meaning rebalancing at the bottom has less impact. All of this coupled with potentially lower equity returns in the subsequent "boom" years means overall returns could be quite a bit lower. This makes me worry that having only 25% equities in "growth" years is not enough to sustain previous WR's on portfolios like the PP.
I'll the be the first to say I don't entirely understand all investing but my takeaway from the book is that volatility in all assets brings the returns. My portfolio is up 2% in a month due mostly to recession fears pumping up gold and really pumping up thirty year bonds. The thirty year bonds I bought in December 2018 are up 27%. It makes my eyes water a little bit (shock mostly). To my inexperienced eye that seems like a huge gain, quickly.

I got into the PP in 2013 and promptly lost money. It took a lot of *something* to stay the course when everyone else is making bank in stocks. FOMO got me in the end (the last two years) and I even bumped up the stock allocation 2% over all to switch to 19% total market and 9% SCV (which is red red red with losses). The only plus was that much of the stock that I did have since 2013 was in my Roth. I doubled that account - the perfect one to pump up. Now the Roth is a mini PP because I want to keep that money.

The thing about the PP is that no matter what something will be doing shitty it seems. That is part of its design I think. Over time those red digits faded for me (in the accumulation phase) but perhaps there will always be something that triggers the red/regretful/why-did-I-buy-that-dud feelings.

On the other hand I can ignore it for months on end and concentrate on other skills to survive the upcoming climax apocalypse.

I agree with all returns going down due to resource depletion. I just don't think the PP is necessarily going to do all that worse than other plans long term. No one is going to do all that well it seems.

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