Permanently low interest rates?

Ask your investment, budget, and other money related questions here
Seppia
Posts: 1378
Joined: Tue Aug 30, 2016 9:34 am
Location: Italy

Re: Permanently low interest rates?

Post by Seppia »

ertyu wrote:
Mon Dec 23, 2019 11:22 am
No. The claim is that the QE fed + boj + ecb are running is pushing up equities.
mmmh
That is an entirely different statement compared to the usual "it's the Fed"*.
Because the above is clearly ONE of the reasons for high equity valuations. The massive performance gap between USA and rest of the world (last decade) proves it's not THE reason (otherwise they'd be all buoyed equally).
Which is all I am trying to say.

*can we at least agree "it's the Fed" people believe rates are too low and this is what's pushing equities up?
ertyu wrote:
Mon Dec 23, 2019 11:22 am
I never claimed the Fed is pushing up equities through lower interest rates, that's some opinion you don't like that you put in my mouth and kept arguing against even when I kept saying that no, US equities have higher valuations because of the higher US rates.
I'm sorry, since you posted after my rebuttal of "it's the Fed", I lumped you in with "them", and I'm probably mistaken.

But I still think this statement of yours is at odds with your claim above.

If you claim QE pushes equities up
but we know QE pushes rates down
How can the USA having higher interest rates be the reason why US equities are up more

Something doesn't compute

ertyu
Posts: 757
Joined: Sun Nov 13, 2016 2:31 am

Re: Permanently low interest rates?

Post by ertyu »

This is extremely oversimplified.
Because it is oversimplified it is probably imprecise.
That said.

1.US gvt issues treasuries.
2.US gvt sells treasuries to US primary dealers, gets cash.
3.US primary dealers have no cash, lots of treasuries.
3a. Fed does repo: dealers give fed treasuries in exchange for cash.
3b.Let's say someone in Europe or Japan has borrowed cheaply and bought US treasuries (which is an oversimplification, from what I gather the meat of the trade is FX swaps and then the rest is knock-on effects). Someone in the US gets the cash in exchange for these treasuries. Who? Dealers.

3a + 3b: Yay! Dealers now have cash. Dealers now have to do something with that cash. Part of it goes into equities. Part of it is lent to others through repo: could be corporates that then turn around and do buybacks with the borrowed cash, could be other banks, could be hedge funds.

the tl;dr: is that the cash eventually finds its way into the US stock market, and it's the US stock market not the JP or EU ones because of the higher yields on USD.

Where I got this info: podcasts (macro voices, market huddle, bloomberg zoltan pozhar) + stuff people wrote on the internet that I read. I am also a retail pleb trying to make sense of a very complex monetary plumbing system in the wake of this repo thing. I am not a gold bug.

My favorite tinfoil hat theory, to whom it may concern: jeff sneider has spent the last three months yelling, BUT COLLATERAL11!!1 - he's been arguing that this is not a cash shortage or a regulatory issue it's a collateral quality issue: repo malfunctioned because some banks don't want to accept collateral from some other banks. Fed's repo operations go around this because everyone who's big and important enough to do be allowed to do business at the fed is treated equally at the discount window. We're waiting for "a credit event" - what if the event either already happened or is close to happening (deutsche?). the fed can't help struggling systemically important global banks directly (afaik there's a law rolling around that they can't pull a 2008-style domestic save again either), but the fed is the central bank of the reserve currency. a global dollar shortage doesn't do anyone any good. thus: fed prints cash to address global dollar shortage, us gvt issues treasuries to supply quality collateral so repo can function, the huge treasury general account bloat is a bonus (and also an insurance against a gvt shut-down).

Last but not least: druckenmiller announced on tv he's long equities because all 3 global cbs are doing qe at the same time. if this qe -> spy link is good enough for druck, it's good enough for me. If you personally don't believe QE causes equities to go up, you're welcome to short the spy.

Seppia
Posts: 1378
Joined: Tue Aug 30, 2016 9:34 am
Location: Italy

Re: Permanently low interest rates?

Post by Seppia »

Ok we’re cool.
I guess my point would be that in 3a + 3b situation, dealers with cash could decide to buy european, Japanese or EM equities.
Instead, they buy USA equities.

So there is an active choice there.

Regarding the last paragraph, I usually don’t like to look at how smart billionaires invest, for many reasons.
Among them, the fact that we usually get only a partial view of what they do (so we miss the big picture), and the fact that billionaires have goals and means that are significantly different from mine.

Last, I personally don’t like to short anything (infinite downside, MUST be right with timing), but if I did, I would definitely bet on an underperformance of the USA equities vs the rest of the world during the next decade.

Augustus
Posts: 1100
Joined: Sat Apr 02, 2016 10:15 am

Re: Permanently low interest rates?

Post by Augustus »

What about TINA? I imagine that ridiculously low bond yield has pushed a LOT of money from bonds into stocks and real estate. You've also got banks pushing low interest loans, which a lot of investors are using for leveraged investments. TINA alone could explain these valuations IMO, where else are most Americans going to put their money when bonds are off the table? If the only choice is equities, people will buy regardless of expected yields, 1-2% is better than 0% after inflation seems to be the reasoning.

Low interest loans are also fueling stock but backs aren't they?

When the fed hiked rates, markets faltered. I would have loved to have seen what happened if the fed put them all the way back to 5-6%

ertyu
Posts: 757
Joined: Sun Nov 13, 2016 2:31 am

Re: Permanently low interest rates?

Post by ertyu »

Augustus wrote:
Mon Dec 23, 2019 7:35 pm
I would have loved to have seen what happened if the fed put them all the way back to 5-6%
Both the stock and bond mkt will have the mother of all sell-offs, the eurusd will probably go to .8, massive amounts of debt downgraded to junk -> insitutional investors who can't hold junk must sell, HYG + JNK obliterated, Oaktree makes bunk. Ditto Bridgewater with their 1.5bln put

Edit: I forgot about the strong dollar --> half the emerging markets (*ahemchinaahem*) default on dollar-denominated debt.

My guess is any wealth that doesn't get destroyed goes to uk/eu/sk/sg/jp as they're left standing

Seppia
Posts: 1378
Joined: Tue Aug 30, 2016 9:34 am
Location: Italy

Re: Permanently low interest rates?

Post by Seppia »

For the 10th time @Augustus: of the above is the only cause, how can you explain why Europe and Japan who have even lower bond yields aren’t experiencing a similar lift?

@ertyu: very plausible outcome. The incentives to do so are simply not there. Why create a massive crisis?

ertyu
Posts: 757
Joined: Sun Nov 13, 2016 2:31 am

Re: Permanently low interest rates?

Post by ertyu »

For the 10th time, Seppia: because a lot of what boj and ecb print makes its way out of those countries and is invested into the sp500 lol

Seppia
Posts: 1378
Joined: Tue Aug 30, 2016 9:34 am
Location: Italy

Re: Permanently low interest rates?

Post by Seppia »

No, his reasoning is purely confined to the USA - different argument than yours.

Mister Imperceptible
Posts: 1196
Joined: Fri Nov 10, 2017 4:18 pm

Re: Permanently low interest rates?

Post by Mister Imperceptible »

90% of the world’s debt is denominated in US dollars. This creates an enormous demand for US dollars despite the fact that the US has a massive government deficit and a massive trade deficit. Which means it will work as long as it works, and when it stops working it will reverse in a big way.

Most of the mechanics @ertyu describes regarding Treasuries and repurchase agreements apply.

For the last 10 years, the ONLY net buyer of US equities have been corporations using buybacks. (See graph in Dave Collum link below.)

Buybacks are possible because of the massive corporate debt bubble.

And the massive corporate debt bubble has been made possible by....ultra low interest rates worldwide.

Dave Collum explains the buyback dynamic in more detail.

To answer @Seppia’s objection as to why the US markets march relentlessly upward while European and Japanese markets do not, again the higher yields for the USD and the demand for USD because 90% of world debt is denominated in USD creates USD demand and those dollars eventually find their way into US equities.

There is also an argument that in low/no growth world, investors overbid for ANY perceived growth, such as the perceived growth of the FAANG stocks. Even if that growth is not real. Although I think USD demand is the real factor, and if 90% of the world’s debt was denominated in yen because Japan had the world reserve currency, then the FAANG-like stocks would all be in Japan.
Last edited by Mister Imperceptible on Tue Dec 24, 2019 10:41 am, edited 1 time in total.

Seppia
Posts: 1378
Joined: Tue Aug 30, 2016 9:34 am
Location: Italy

Re: Permanently low interest rates?

Post by Seppia »

Thanks everybody for taking the time

Mister Imperceptible
Posts: 1196
Joined: Fri Nov 10, 2017 4:18 pm

Re: Permanently low interest rates?

Post by Mister Imperceptible »



Seppia
Posts: 1378
Joined: Tue Aug 30, 2016 9:34 am
Location: Italy

Re: Permanently low interest rates?

Post by Seppia »

My view: share buyacks aren't necessarily evil per-se.
In a vacuum, they are probably the most tax efficient way to give capital back to shareholders.
Also, if timed smartly, they can be a great investment.

Problem is things don't happen in a vacuum and IIRC multiple studies show massive repurchases are consistently done with the worst possible timing (huge repurchases at market peaks, they are the first thing to be cut in bad times).

Another example: I would be all-in borrowing to fund share buybacks in the case of a company with solid balance sheet, no ways of deploying capital and great return on assets (think cigarette companies with relatively low debt).

So I would say it depends. I don't think buying back shares is always a bad thing.
It sure seems like many US companies have ballooning debts due to huge borrowings used for share repurchases. It's basically a way of increasing leverage.

Mister Imperceptible
Posts: 1196
Joined: Fri Nov 10, 2017 4:18 pm

Re: Permanently low interest rates?

Post by Mister Imperceptible »

Seppia, this is the chart from the Collum Year in Review I recommended.

Buybacks post-2008 are just not a feature of the market. They are the market.

Buybacks supported by the record corporate debt.

Record corporate debt support by record low interest rates.

Market Cap to GDP in the US now over 152%, surpassing the peak of 148% in March 2000.

But in 2000 the US National Debt to GDP was 56% compared to 106% today.

Tick tick tick tick tick tick tick.........

jacob
Site Admin
Posts: 12247
Joined: Fri Jun 28, 2013 8:38 pm
Location: USA, Zone 5b, Koppen Dfa, Elev. 620ft, Walkscore 73
Contact:

Re: Permanently low interest rates?

Post by jacob »

Near ZIRP has made it very tempting for corporations to institute a massive leveraged buy-out of themselves. Essentially the LTdebt/equity rate has changed materially. This makes it easier to create ROE (because the E is lower as it has been replaced with debt). This will last exactly as long as corporations can maintain their debt-service. There are two things that could end this strategy. 1) Short term(*) interest rates increase. 2) Corporate earnings decrease (dividends would be cut first).

(*) Look at the duration of corporate financing and realize that the market control the long end and the central banks the short end.

The structure is similar to the 2007/8 real estate bubble except that it's corporations instead of marginal borrowers. And [the perceived risk reduction is] made possible by central banks rather than fancy financial engineering tranching. This does mean that the equity markets are more responsive to short interest rates than they otherwise would be.

Despite and maybe because of various gurus whining about corporate debt, at least some corporations are working on decreasing their leverage.

Would you like to know more?(*) Consider the entire yield curve vs the debt structure of the companies you invest in.

(*) Just a Starship Trooper reference :P

Seppia
Posts: 1378
Joined: Tue Aug 30, 2016 9:34 am
Location: Italy

Re: Permanently low interest rates?

Post by Seppia »

@MI:

Don't get me wrong, I agree with you 100% on the assessment (I own a grand total of 0% usa equities right now, and 0% bonds).
I've definitely increased my cash allocation, and as stated above I moved 100% away from the USA in terms of equities*

It's just that I know I don't know, so I'm always afraid going all-in on one strategy.
I'm sure my approach will never make me massively overperfom, but the flipside is it won't make me massively underpeform as well.
That's fine with me

*I have mentioned this many times on this forum

@jacob: I am reassured when my big stock holdings have decided to reduce leverage and pay down debt starting early last year of earlier. Sounds to me like "hey we had a great opportunity lately but this bonanza is about to end someday, so we're back to being wise"

Mister Imperceptible
Posts: 1196
Joined: Fri Nov 10, 2017 4:18 pm

Re: Permanently low interest rates?

Post by Mister Imperceptible »

Love the Starship Trooper reference!

The wrinkle regarding whether the short-term rates are controlled by central banks is to look at the developments in the repo market since mid-September, and what is the feedback loop between the increasing national debt and the repo market developments.

bigato
Posts: 2643
Joined: Sat Mar 05, 2011 12:43 pm
Location: Brazil

Re: Permanently low interest rates?

Post by bigato »

Seppia wrote:
Thu Dec 26, 2019 1:30 pm
It's just that I know I don't know, so I'm always afraid going all-in on one strategy.
I'm sure my approach will never make me massively overperfom, but the flipside is it won't make me massively underpeform as well.
That’s why I half-jokingly proposed to start placing bets on whether MI will go broke or get rich. That and the fact that, when asked how his portfolio would react to him being wrong, he avoided the question by making fun of the people questioning him.

jacob
Site Admin
Posts: 12247
Joined: Fri Jun 28, 2013 8:38 pm
Location: USA, Zone 5b, Koppen Dfa, Elev. 620ft, Walkscore 73
Contact:

Re: Permanently low interest rates?

Post by jacob »

@Seppia - Last year (around Nov 2018) I eliminated all my holdings which demonstrated an above average (relative to their sector) debt/equity level EXCEPT the ones (count: 2) that had made a big issue of deleveraging. They've subsequently followed through. Happy so far.

I'm convinced that the CEO/politico world is actually pretty small (sufficiently small relative to the Dunbar number) and many of these guys know each other already. So it's just a question of who is paying attention and who is following who. I stopped believing that this is about numbers/reality about 10 years ago. This is a greater fool market now. I just try to be a lesser fool.

Mister Imperceptible
Posts: 1196
Joined: Fri Nov 10, 2017 4:18 pm

Re: Permanently low interest rates?

Post by Mister Imperceptible »

Did not and am not making fun of anyone. Perhaps I am just am a poor communicator.

If I am wrong and precious metals markets move sideways, I am ok with that, it means I can buy more cheaply. My derivatives bets are a small portion (less than 20%) of my portfolio that could conceivably blow up. In which case we would have to see whether I have the balls to roll forward at a loss and continue with the strategy.

My portfolio does not exist in a vacuum. Meaning, the side-effect of being wrong is that the current state of the economy remains intact and I am able to earn more dollars that have not yet materially depreciated. The side-effect of being right is that I might be out of a job, hence the reason to position for explosive gains in the event I am right.

Note the difference: Dr. Fisker is managing a portfolio from “retirement” and I am still accumulating. A major component of my portfolio strategy is to hedge against the future loss of the ability to accumulate as rapidly (in real terms).

Consider it like building a portfolio backward from as it is traditionally understood. Instead of taking on more equity risk early or midway thru the accumulation phase, recognize that the ability to accumulate and contribute to the portfolio is correlated to the greater economy (and hence equity performance). This ensures that the loss of the ability to accumulate during equity-economy downturn is compensated for by not suffering major portfolio losses early or midway thru the accumulation phases.

Post Reply