Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
US Economy Has Been in an Economic Depression Since 2008 - 22nd Oct 21
Extreme Ratios Point to Gold and Silver Price Readjustments - 22nd Oct 21
Bitcoin $100K or Ethereum $10K—which happens first? - 22nd Oct 21
This Isn’t Sci-Fi: How AI Is About To Disrupt This $11 Trillion Industry - 22nd Oct 21
Ravencoin RVN About to EXPLODE to NEW HIGHS! Last Chance to Buy Before it goes to the MOON! - 21st Oct 21
Stock Market Animal Spirits Returning - 21st Oct 21
Inflation Advances, and So Does Gold — Except That It Doesn’t - 21st Oct 21
Why A.I. Is About To Trigger The Next Great Medical Breakthrough - 21st Oct 21
Gold Price Slowly Going Nowhere - 20th Oct 21
Shocking Numbers Show Government Crowding Out Real Economy - 20th Oct 21
Crude Oil Is in the Fast Lane, But Where Is It Going? - 20th Oct 21
3 Tech Stocks That Could Change The World - 20th Oct 21
Best AI Tech Stocks ETF and Investment Trusts - 19th Oct 21
Gold Mining Stocks: Will Investors Dump the Laggards? - 19th Oct 21
The Most Exciting Medical Breakthrough Of The Decade? - 19th Oct 21
Prices Rising as New Dangers Point to Hard Assets - 19th Oct 21
It’s not just Copper; GYX indicated cyclical the whole time - 19th Oct 21
Chinese Tech Stocks CCP Paranoia, VIES - Variable Interest Entities - 19th Oct 21
Inflation Peaked Again, Right? - 19th Oct 21
Gold Stocks Bouncing Hard - 19th Oct 21
Stock Market New Intermediate Bottom Forming? - 19th Oct 21
Beware, Gold Bulls — That’s the Beginning of the End - 18th Oct 21
Gold Price Flag Suggests A Big Rally May Start Soon - 18th Oct 21
Inflation Or Deflation – End Result Is Still Depression - 18th Oct 21
A.I. Breakthrough Could Disrupt the $11 Trillion Medical Sector - 18th Oct 21
US Economy and Stock Market Addicted to Deficit Spending - 17th Oct 21
The Gold Price And Inflation - 17th Oct 21
Went Long the Crude Oil? Beware of the Headwinds Ahead… - 17th Oct 21
Watch These Next-gen Cloud Computing Stocks - 17th Oct 21
Overclockers UK Custom Built PC 1 YEAR Use Review Verdict - Does it Still Work? - 16th Oct 21
Altonville Mine Tours Maze at Alton Towers Scarefest 2021 - 16th Oct 21
How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
The Only way to Crush Inflation (not stocks) - 14th Oct 21
Why "Losses Are the Norm" in the Stock Market - 14th Oct 21
Sub Species Castle Maze at Alton Towers Scarefest 2021 - 14th Oct 21
Which Wallet is Best for Storing NFTs? - 14th Oct 21
Ailing UK Pound Has Global Effects - 14th Oct 21
How to Get 6 Years Life Out of Your Overclocked PC System, Optimum GPU, CPU and MB Performance - 13th Oct 21
The Demand Shock of 2022 - 12th Oct 21
4 Reasons Why NFTs Could Be The Future - 12th Oct 21
Crimex Silver: Murder Most Foul - 12th Oct 21
Bitcoin Rockets In Preparation For Liftoff To $100,000 - 12th Oct 21
INTEL Tech Stock to the MOON! INTC 2000 vs 2021 Market Bubble WARNING - 11th Oct 21
AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
Stock Market Wall of Worry Meets NFPs - 11th Oct 21
Stock Market Intermediate Correction Continues - 11th Oct 21
China / US Stock Markets Divergence - 10th Oct 21
Can US Save Taiwan From China? Taiwan Strait Naval Battle - PLA vs 7th Fleet War Game Simulation - 10th Oct 21
Gold Price Outlook: The Inflation Chasm Between Europe and the US - 10th Oct 21
US Real Estate ETFs React To Rising Housing Market Mortgage Interest Rates - 10th Oct 21
US China War over Taiwan Simulation 2021, Invasion Forecast - Who Will Win? - 9th Oct 21
When Will the Fed Taper? - 9th Oct 21
Dancing with Ghouls and Ghosts at Alton Towers Scarefest 2021 - 9th Oct 21
Stock Market FOMO Going into Crash Season - 8th Oct 21
Scan Computers - Custom Build PC 6 Months Later, Reliability, Issues, Quality of Tech Support Review - 8th Oct 21
Gold and Silver: Your Financial Main Battle Tanks - 8th Oct 21
How to handle the “Twin Crises” Evergrande and Debt Ceiling Threatening Stocks - 8th Oct 21
Why a Peak in US Home Prices May Be Approaching - 8th Oct 21
Alton Towers Scarefest is BACK! Post Pandemic Frights Begin, What it's Like to Enter Scarefest 2021 - 8th Oct 21
AJ Bell vs II Interactive Investor - Which Platform is Best for Buying US FAANG Stocks UK Investing - 7th Oct 21
Gold: Evergrande Investors' Savior - 7th Oct 21
Here's What Really Sets Interest Rates (Not Central Banks) - 7th Oct 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Negative Real Interest Rates Show Yield Trade in Bubble Territory

Interest-Rates / International Bond Market Aug 22, 2014 - 04:35 PM GMT

By: EconMatters


No Financial Crisis

This is one of my main criticisms of central bank policy, especially the last three years when there was no financial crisis but all the central banks continued to keep interest rates at recession era levels which has incentivized inappropriate uses of capital allocation, and this money being used for yield arbitrage plays would be more beneficial to sustainable growth projects and overall growth in the economy if interest rates were normalized.

ECB Rates Too Low – Deflationary Capital Allocation Incentives

We see the pernicious aspects of below normal interest rates; the lower they go the more inappropriate and actually deflationary aspects in some cases of how investment capital is allocated. Take for example, the recent ECB measure to lower their equivalent Fed Funds Rate from 25 to 15 basis points, what did this incentivize? It incentivized a bunch of capital to run into European Bonds which were already at recent historical lows and chase more yield plays, so much so that the German short term debt up to two years has even gone negative on real rates.

When you have investors flocking to investment choices all in an effort to take advantage of ridiculously low borrowing costs, really 15 basis points, more time and energy is spent on paper or in this case electronic arbitrage capital allocation strategies, that could better be spent in other areas of the European economy which actually promoted business development projects with real returns, and not more electronic arbitrage plays where all the capital stays locked up in financial markets and does no good for the economy at large, it creates no jobs in Europe!

Japan is Prime Example of the Curse of a Low-Rate Strategy

We see it in Japan, low rates for a prolonged period of time are deflationary in a sense because they encourage the wrong types of investment choices, strictly financial yield and carry trades instead of alternative and more productive capital allocation in terms of small business loans and business development projects.

Read More >>> The U.S. Bond Market Is Not Europe or Japan

Normalized Rated Get Rid of Many Non-Productive Capital Allocation Strategies

Normalized rates lead to real lending because the banks realize that they can no longer do these stupid yield arbitrage finance ‘gimmickry’ plays and must find real means of making money, i.e., make loans to businesses and produce real growth in the economy.

Corporations Need Real Growth When Stock Buybacks are no Longer an Option

Furthermore, corporations also play a role in this because they no longer think gee I can borrow so cheaply let me borrow at these absurdly low rates and buy back stock, low rates for psychological reasons, and I mean rates at such abnormally low levels, actually affect the psychology regarding how capital is used by corporations. It shouldn`t make a difference but it sure does, a healthy interest rate almost mandates a healthy investment return and a productive use of capital by corporations.

You sure don`t see corporations borrowing and loading up on debt to buy back stock when interest rates are higher! It is almost as if low rates incentive having little respect for the value of money, where with normalized rates respect for capital and the value of money is increased. I sure notice this correlation effect, when a corporation doesn`t think about buying back stock to make their EPS number look better, then they have to look for alternative ways to make their stock attractive to investors and make their numbers. This leads to more focus on growing the business, so then borrowing goes to organic growth and business development projects that add real economic might in the form of ‘additive effects’ to the economy.

Read More >>> The Oil Market QE Premium Is Coming out of Price

Central Banks can Promote the right kind of Capital Investments

This is how central banks can incentivize the right kinds of behavior by corporations and investors which add real sustainable growth to the economy by raising interest rates, and thereby raising the importance and value of capital. This leads to real capital allocation strategies instead of what we have today which negative real rates are illustrating via the incessant and over-reaching for yield in all areas at the expense of more productive uses of this same capital.

Zero-Bounding Rates is not the Answer for Real Growth

The ECB needs to learn the lessons of Japan that actually raising interest rates instead of lowering interest rates once you cross the 50 basis point threshold is actually simulative for growth by better incentivizing the right kind of capital investment in the region to more productive means. The proof is in the pudding: How long was the ECB rate at 25 basis points, how long under 100 basis points? And what was the growth in the EU over this time?

Basically nonexistent, once you cross and stay below the 50 basis point threshold, a central bank is actually doing more harm to their economy than good, maybe at first blush it seems paradoxical in nature, but if you examine some of the negative side effects of zero-bounding rates for an extended period of time it starts to make sense.

Once a certain interest rate threshold is reached, ‘zero-bounding’ rates for an extended period actually stunts economic growth and central banks need to come to grip with this monetary reality! Anytime there are negative or even close to negative real rates for bonds that is a sign that central banks need to change policy, they are in a sense reinforcing the very thing they are trying to avoid, they incentivize an over-reaching for yield at the cost of real growth, and this is deflationary, as it lowers the value of money.

By EconMatters

The theory of quantum mechanics and Einstein’s theory of relativity (E=mc2) have taught us that matter (yin) and energy (yang) are inter-related and interdependent. This interconnectness of all things is the essense of the concept “yin-yang”, and Einstein’s fundamental equation: matter equals energy. The same theories may be applied to equities and commodity markets.

All things within the markets and macro-economy undergo constant change and transformation, and everything is interconnected. That’s why here at Economic Forecasts & Opinions, we focus on identifying the fundamental theories of cause and effect in the markets to help you achieve a great continuum of portfolio yin-yang equilibrium.

That's why, with a team of analysts, we at EconMatters focus on identifying the fundamental theories of cause and effect in the financial markets that matters to your portfolio.

© 2014 Copyright EconMatters - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

EconMatters Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in