Permanently low interest rates?

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Lemur
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Re: Permanently low interest rates?

Post by Lemur »

tonyedgecombe wrote:
Thu Nov 14, 2019 5:57 am
I do wonder what difference modern technology would have made to the USSR, certainly it would have made monitoring and controlling its population easier but could it have made the whole thing more economically viable. I don't particularly like the idea but I wouldn't be surprised to see the developed world fall into such a system.

By the way I don't think there are any Western European countries that are centrally planned, even the Scandinavian countries have free market economies.
Good point. While not centrally planned, I think they're 'planned' a bit more than the U.S. I should probably read a general overview of why the European market faces challenges that we (United States) don't. Is it because there wages & benefits are simply better? Taxes being higher drags down productivity or something?

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Re: Permanently low interest rates?

Post by jacob »

fiby41 wrote:
Thu Nov 14, 2019 7:52 am
Can y'all invest in countries that give higher interest rates?
There's a catch in that higher interest rates are sometimes/often offered not as a way to control the domestic economy (e.g. prevent overheating = malinvestments) but to attract foreign capital to prop up the currency(*). In such a case foreign investors risk losing more on currency than they gain on the interest.

(*) Alternatively, they might lower interest rates to weaken the currency to allow for more exports.

Technically, currency pairs are some of the easiest trades to arb out ... so where you put your cash all depends more on the economy of the country than the specific interest rate.

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Re: Permanently low interest rates?

Post by tonyedgecombe »

Europe is quite diverse, for instance on tax Italy and Germany have similar levels of tax as a proportion of GDP but their economies and fiscal situation are very different. Norway has an economy built on resource extraction, Greece has one based on agriculture and tourism, the UK based on financial services, Germany on manufacturing. Considering it as a single nation won't really tell you anything.

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fiby41
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Re: Permanently low interest rates?

Post by fiby41 »

jacob wrote:
Thu Nov 14, 2019 9:26 am
but to attract foreign capital to prop up the currency
Interesting insight. However I have reasons to doubt that is the intention.
1. Rate cards of the few commercial banks I've seen have a separate column with lower interests for PIOs
2. This year's union budget barred NRIs from earning 7.9% on their tax exempt accounts. This was later repealed as the income tax department was not able to clarify who all are barred as the years are different for different countries
3. FII can enter and exit anytime they want using p-bills.

PIO persons of Indian origin
NRI non residential Indians
FII foreign institutional investors

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Re: Permanently low interest rates?

Post by jacob »

@fiby41 - Yeah, could be any reason (I don't know much about the Indian economy). Look at INR/EUR (the Euro is useful/easy because EUR interest rates have been near 0% for years). You can see that the INR has been declining on a relative (EUR) basis. The question is, then, if the INR yield has been enough to make up for that. If so, INR was the better investment, if not, EUR was the better one. Arbitrage would suggest that ceteris paribus, the outcome should have been even (or random).

The same factors must be considered when one invests in foreign stocks. It is then important to know if they're currency hedged. Otherwise one might find that while the stock goes up, the currency has gone down => maybe the stock has gone nowhere. For that reason, it's generally insightful to look at how stock market indexes have performed not just in their own currency but also in other currencies (or currency baskets).

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Re: Permanently low interest rates?

Post by ertyu »

So I wrote a rant. I thought about it a little and regretted it. There is nothing constructive to be gained from this rant. So I deleted it.

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Seppia
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Re: Permanently low interest rates?

Post by Seppia »

ertyu wrote:
Mon Dec 23, 2019 2:51 am
I explained Seppia but you ignored what I was saying and kept with your stuff. Carry trades.
I'm sorry but I responded to that, then you actually deleted your "rant" above so I don't know what you'd written.
ertyu wrote:
Mon Dec 23, 2019 2:51 am
Carry trades. Valuations haven't sky-rocketed in Europe and Japan because the US has higher yields. Thus carry trades. All the EU/JP QE money's going into US instruments that yield more.
So the claim is that the fed is pushing stocks up with rates that are artificially low, but the reason why this is happening is that USA rates are high in relation to EU/JP? My head hurts.

What's the carry trade?
Borrow euros and buy USA treasuries? then what exactly is the impact on USA equities?

Borrow euros and buy USA stocks? Euro stocks yield more and would involve no currency risk, so this would mean market participants are actively picking USA stocks over euro/Jp stocks (hence, not the Fed)

Borrow in USD and buy USA equities? Then why aren't european and japanese people doing the same? Their central banks are even more accomodating

Also, the statement that "all the EU/JP money is goingo into US instruments" is factually incorrect

I'm not saying the Fed/Central banks play no role in stock market valuations (they certainly do), what I'm saying is that "it's the fed gaming the system" sounds a lot like a self-absolving excuse from a bunch of bears/gold bugs that have been consistently wrong for the last 8-9 years.

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Re: Permanently low interest rates?

Post by ertyu »

No. The claim is that the QE fed + boj + ecb are running is pushing up equities. But yes, I deleted because I sensed it would be unproductive. 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'd rather not argue about this.

Edit: of course the statement "all ..." is factually incorrect. It starts with "all." It is a figure of speech. Replace with "a significant portion" if it makes you happier.

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Seppia
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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

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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.

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Seppia
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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.

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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

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Seppia
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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?

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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

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Seppia
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Re: Permanently low interest rates?

Post by Seppia »

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

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Mister Imperceptible
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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.

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Seppia
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Re: Permanently low interest rates?

Post by Seppia »

Thanks everybody for taking the time

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Mister Imperceptible
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Re: Permanently low interest rates?

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