Permanently low interest rates?

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Seppia
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Re: Permanently low interest rates?

Post by Seppia » Wed Aug 21, 2019 2:12 pm

https://www.bloomberg.com/news/articles ... ction-year?

Unless Trump loses in 2020 (unlikely), this era may be remembered as the USA’s equivalent to Italy’s 80s: a debt fueled, unsustainable sugar high of prosperity for a declining nation, ultimately setting the stage for decades of going nowhere.

Obviously the USA is 102727384748 times more resilient and stronger than what Italy ever was, but when short term thinking, opportunistic, old politicians use debt any time they can, things ultimately get to a level where it’s impossible to turn back.

Italy has been running “primary surpluses” (meaning before debt interest payments) for years now, but even with interest rates so low in Europe, zero growth + 140% debt to GDP ratio = an unwinnable war with math.
Once you get there, you’re screwed.

In this Nth disproval of a theory that has never worked (see Kansas VS California for another recent example), it is literally unbelievable that trickle down economic theorists aren’t getting laughed of any room on this planet, and that some politicians still present this bullshit with a straight face.

classical_Liberal
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Re: Permanently low interest rates?

Post by classical_Liberal » Thu Aug 22, 2019 3:14 am

Seppia wrote:
Wed Aug 21, 2019 2:12 pm
Italy has been running “primary surpluses” (meaning before debt interest payments) for years now, but even with interest rates so low in Europe, zero growth + 140% debt to GDP ratio = an unwinnable war with math.
Once you get there, you’re screwed.
Italy has no direct control over it's own currency. It can't inflate away it's debt, this is the number 1 problem, IMO. The US can, and to top it off much of the debt is owned by foreign governments/investors, so the negative affects are spread thinner and globally. Not just centered on decreasing the purchasing power of it's own citizenry.

black_son_of_gray
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Re: Permanently low interest rates?

Post by black_son_of_gray » Thu Aug 22, 2019 3:31 pm

jacob wrote:
Wed Aug 21, 2019 7:30 am
I once read a paper on option pricing that IIRC started with the axiom that the market always strove to maximize disagreement. [...] I like the triple or N-ple point theory, but I fear that the market is ALWAYS in such a state unless it's moving rapidly. Therefore, it's not directly useful.
A fair point, and I agree with it—but it requires disagreement to work, and there isn't always disagreement on some market-related variables. Which is to say, in any given market and at any given time, there is a common knowledge among investors that almost no one disagrees with. Or maybe a small minority of dissenters exists, but the market's so thin on a particular trade for that position that no one even tries to make it.

For example, let's tease apart inflation, disinflation, deflation, and interest rates in the US over the last 60 years or so (since leaving the gold standard). Here's a graph of inflation data:

Image
(Image link)

Prior to ~1970, the US regularly flipped between inflation and deflation states. As a result, deflation was definitely a possibility in the minds of investors, and investors might disagree on that—and then the axiom of maximum disagreement would apply. But some time after 1970, after the US had been solidly in an inflation state for a while (akin to the ice at -100C), serious consideration of deflation dropped from the common knowledge of investors, and the disagreements that arose when considering interest rate changes ceased to be between inflation/deflation and shifted towards inflation/disinflation. That is, there weren't any disagreements that there would be inflation, just with how much inflation at a given interest rate (which weren't anywhere near zero). And over the decades (i.e. longer than just about every investor has been in the market) that has slowly morphed into market common knowledge. But now that interest rates (and inflation) have crept down towards zero over the past decade, deflation is starting to poke its way back into investment consideration. The ice is still frozen, but sitting at -1C instead of -100C.

I also totally agree with you on the Keynesian beauty contest angle of keeping tabs on how all the different factions are interpreting the situation. I guess my argument as to why the current situation is different (uh oh—I've done it now!) is that I'm saying there is a new category in beauty standards that hasn't been considered for the last few pageants. If you feel like you've got a good idea how the audience judges bikinis in the swimsuit competition, what do you do when a guy comes out on stage in a Speedo?

This triple point idea is almost certainly not directly useful in predicting which outcome is most likely to happen. Where I think it could be useful is in understanding the dynamics of whatever happens (e.g. rapid switching between inflation/deflation states) or in understanding that each of these states is actually possible and maybe even probable, which helps an investor keep an open mind to outcomes and hedge appropriately.

Or, y'know, maybe I just went too far with a metaphor. It's not like I don't do that constantly anyway. :mrgreen:

bigato
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Re: Permanently low interest rates?

Post by bigato » Thu Aug 22, 2019 4:00 pm

Very interesting analysis, thank you

Seppia
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Re: Permanently low interest rates?

Post by Seppia » Fri Aug 23, 2019 2:05 am

There was a recent, very interesting, Twitter thread by Paul Krugman on the subject

https://twitter.com/paulkrugman/status/ ... 90112?s=21

jacob
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Re: Permanently low interest rates?

Post by jacob » Fri Aug 23, 2019 10:10 am

@bsog - On way to describe [any] market is WLOG to see it as a battle between P("V") and dP("V")/dt, where P is the price and "Value" is some esoteric quantity calculated by fundamentals, pop culture, mouse clicks, or whatever. Let draw a graph where P is on one axis and P' (the time derivative) is on the second axis.

I submit this covers a large fraction of most investment strategies. Two important ones it doesn't cover (which consequently are not efficient and thus sources of alpha ... at least they were 10 years ago) are quant-strategies based on price momentum based on volume instead of time (this drives day traders up the wall, because volume is just not a natural independent variable for the human trader) and gamma strategies which would be based on P''. (That's why I said WLOG ... feel free to draw more dimensions.)

Now the P and the P' axis are best drawn logarithmicly. WLOG again, think of it as ms, s, 1000s, 1000000s, .... so from millisecond holding/focus (computers), seconds (clicker traders), hours (day traders), ... months, years, decades, forever.

Now if it was actually possible to know, it would be really interesting to see each trader---perhaps with a dot signifying their size---and where they concentrate in this 2D-land.

This goes to the comment you made about agreement/disagreement. Disagreement is 100% on the microscale for a "stable price", this being the very definition of a clearing market. But as you note, the agreement tends to be HIGH on the global scale to the point where the perception of other dimensionalities are completely lost. (Like how humans only perceive 4 dimensions of spacetime even though there are likely 10, 11, or 26 dimensions in "reality".)

For example, if we look at the plot, there are very few people who act as if they take a long term view. 10 years of pain is enough to cause 99.99% of investors to switch strategy. This is kind of where we are now. P("V") are beginning to throw their hats into the P'("V"). In lowbrow terms, value investors for whom stocks have been overvalued since 2014 and have consequently been sitting in cash and moving(*) towards the momentum side (prices always go up). I just saw that Hussman gave up on the previous strategy in 2017.

It's well-known that moves stop just when the last person who will ever change their mind changes their mind. That is, a bull market stops when there are no more convertible bears left. Reasoning being that the source of buying pressure is gone and so prices must go down. This is the point where the "unseen agreement" breaks and prices move a lot. (One unseen agreement is that interest rates will remain permanently low---that central banks can successfully engineer a sustainable zombie economy.)

All this is just to explain the dynamics (why prices move). You're mainly talking about the dimensionality of the problem---which dimensions.

Jason
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Re: Permanently low interest rates?

Post by Jason » Thu Aug 29, 2019 5:53 am

I searched the site engine for Silvio Gesell and it appears a poster named Haplo posted a paper of his in 2012. But the link has expired.

https://www.npr.org/sections/money/2019 ... ed-prophet

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