Low Interest Rates Forever
di Walter Snyder, Swiss Financial Consulting
Every word of Fed communiqués is painstakingly examined in expectation of imminent rises in the interest rate in the belief that forward guidance somehow will indicate what is going to happen to the global world of finance. The fact is that the dotcom bubble of 2000 and the 2008 recession were caused by the Americans, and the next financial storm is about to be unleashed by the same people. The cure for the 2008 recession is going to prove worse than the illness it was supposed to treat. By reducing interest rates to near zero and injecting huge sums of liquidity into the system, the Fed made it easy for bond managers to make nifty profits by selling off paper that had increased its book value significantly. Low interest rates made it easier for the US government to service the enormous debt that was being piled up while European and Japanese governments rejoiced at having to pay so little to service the mountains of debt that bailouts and mismanagement had created.
The problem is that low interest rates and a fall in the price of oil have resulted in low prices, which have produced very little inflation and even deflation in some cases. Debtors prefer inflation since their debts diminish the more that inflation increases. Deflation is anathema for debtors as it makes their burden even heavier to bear. If fighting inflation was the main task of central bankers in the 1970s, trying to spur inflation is now their greatest desire. But despite all the liquidity pumped into the system, inflation, just like a weak spark, wavers and flutters and fails to catch.
The conclusion is that investors and asset managers should get out of bonds while the getting is still good. Some high-yield corporate bonds may fair better than government paper, but the going will be rough in any case. Bond fund managers who boasted of their prowess will rue the day the Fed decides to increase interest rates even by as little as 10 basis points as that move will set off a wave of selling that will shake the global economy.
There is also the consideration that low interest rates have made it possible for many inefficient companies to survive the recession as it has been so inexpensive to borrow on capital markets. The flurry of mergers and acquisitions in the US oil industry is only a foretaste of what will happen to the economy as a whole when interest rates return to 4% or more. We shall therefore have to thank the Americans once again for having shown the way to go with QE. It is well-known the road to Hell is paved with good intentions. As Keynes said, “In the long run we are all dead”.