Permanently low interest rates?

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unemployable
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Re: Permanently low interest rates?

Post by unemployable »

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.

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Re: Permanently low interest rates?

Post by Riggerjack »

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.

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Re: Permanently low interest rates?

Post by The Old Man »

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."

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Re: Permanently low interest rates?

Post by jacob »


CS
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Re: Permanently low interest rates?

Post by CS »

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 giskard »

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.

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Re: Permanently low interest rates?

Post by CS »

@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.

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Re: Permanently low interest rates?

Post by classical_Liberal »

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.

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Re: Permanently low interest rates?

Post by CS »

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 »

@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 »

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 »

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 »

@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 »

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!

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Re: Permanently low interest rates?

Post by CS »

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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Re: Permanently low interest rates?

Post by IlliniDave »

CS wrote:
Sat Aug 17, 2019 9:46 am
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.
Part of the conventional wisdom is if most of the time you have at least one thing you wish you didn't have, or had less of, and vice-versa, comes with the territory of diversification. Looking at individual components, sometimes wishing you had more and other times wishing you had less of a given asset class is said to indicate being close to an allocation suitable for your risk tolerance/temperament.

Dunno if there's a lot of science that backs up either of those.

I'm not an expert on PP, but I'd tend to agree it's not a huge liability relative to other common allocation strategies, and depending on what a person wants out of their portfolio, it probably has advantages. Looking forward I don't know that any portfolio arrangement can sustain systematic withdrawal rates that past performance suggests. With asset prices high and therefore the outlook for future returns muted, it's reasonable to be a little more conservative in approaching WRs (in practice or at least maintaining the flexibility to do so). Taking on more risk (e.g., substantially increasing stock allocation) is another way to try to counter muted expectations, but it could come at a high cost to peace of mind.

FWIW, I'm converging on something in the 50/50-60/40 range (stocks/bonds+MM) and looking to achieve a sub-2% WR. That's arguably overkill, especially compared to what history suggests is sustainable. But I have goals for my portfolio that extend beyond sustaining me (although if need be some of what's earmarked for other uses also serves as extra margin). Without those I might be comfortable with 3% or a little under given a low return outlook in the medium-term. I could have opted to keep my equity exposure up near where I had it during the heart of accumulation (85%-100%) to support a more aggressive WR, but opted instead to combine dialing back lifestyle a little with extending accumulation to keep volatility/risk lower. I can't represent that approach as being superior to any other, it's just what I'm comfortable with. IOW, I outlined my approach for context, not to make an argument against PP, etc.

It's also wise to look away from a portfolio when contemplating apocalyptic/doomsday scenarios. I don't think the infrastructure nor elaborate system of rules and enforcement that allows us to turn an abstract portfolio into food, shelter, and other tangible things is likely to survive such an occurrence.

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Re: Permanently low interest rates?

Post by jacob »

One thing I'm trying to game out is how the idea of permanently low interest rates remains compatible with the concept of the business cycle.
Does extending low interest rates also extend/slow the business cycle? Is the business cycle driven by the interest rate settings or is it the other way around?

Over the past couple of years, every hiccup on the market (which indexers see as volatility) has caused a slow rotation into non-cyclical sectors. Non-cyclical sectors also tend to pay a yield (cf. non-cyclicals) so this could also be the pensioner's solution to the low interest rates forced by central banks---the other solution being to spend less and save more (in direct conflict with central banks' intention to stimulate the economy). As a result relatively safe and yieldy instruments have done better.

As long as the alpha continues, it doesn't really matter which explanation is true :mrgreen: but it would be nice to know how to disentangle them once it stops.

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Re: Permanently low interest rates?

Post by finity »

jacob wrote:
Tue Aug 20, 2019 8:09 am
One thing I'm trying to game out is how the idea of permanently low interest rates remains compatible with the concept of the business cycle.
Does extending low interest rates also extend/slow the business cycle? Is the business cycle driven by the interest rate settings or is it the other way around?
The ever-lowering interest rates are inherent to our monetary system. Money is basically created by issuing debt. In order to service the debt long-term, a later debtor needs to be found. For a growing monetary base, credit needs to expand.

This can be accomplished by
a) consumer credit (i.e. more debtors, higher debts),
b) corparate bonds / debt taken on by companies
c) government debt

It gets harder and harder to find a later debtor because the population is growing less / not at all anymore, companies have already satisfied their needs and governments are maxed out in terms of debt-capacity. Ever lowering interest rates can diminish this problem by

a) lowering costs to borrow, thus allowing people to borrow more
b) companies take on debt to buy back stock
c) allowing governments to take on more debt than they could afford otherwise (i.e. Italy)
d) forcing banks to lend money to more debtors (negative interest in Europe)

We already are pretty late in this long term credit cycle and it will end the business cycle. When the monetary base starts to contract (or stops growing) money will be hold onto, investments deferred, deflation may happen. That will kill the business cycle.

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Re: Permanently low interest rates?

Post by unemployable »

finity wrote:
Tue Aug 20, 2019 1:46 pm
governments are maxed out in terms of debt-capacity
No they're not. The fact that bond rates are so low is plain evidence to the contrary, and their appetite to borrow more is insatiable.

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Re: Permanently low interest rates?

Post by finity »

unemployable wrote:
Tue Aug 20, 2019 2:26 pm
No they're not. The fact that bond rates are so low is plain evidence to the contrary, and their appetite to borrow more is insatiable.
The reason bond rates are low is because central banks buy up everything they get their hands on (especially the ECB and the Bank of Japan).
The ECB is already running into problems, because they have to buy up bonds of all countries in a fair way, and it's getting harder and harder to get their hands on some of them.

Additionally, european banks put a lot of money into EU-government bonds, because that investment is considered risk-free (by the regulators) and no risk reserve has to be build for it.

Germany will emit 30 year bonds at 0% tomorrow.The US is now discussing to emit 100 year bonds.

Of course their appetite is insatiable, otherwise we would have seen a stronger contraction already ;-) The question is: how much can they afford. And they could afford far less without QE.
Last edited by finity on Tue Aug 20, 2019 2:58 pm, edited 3 times in total.

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