Author Topic: Index Investing in a Permanently Low Interest Environment  (Read 9741 times)

BigBangWeary

  • Stubble
  • **
  • Posts: 117
    • The Great Canadian Housing Bubble Co.
Index Investing in a Permanently Low Interest Environment
« on: October 04, 2015, 11:18:45 AM »
Ok, for arguments sake, lets assume interest rates are not going to be rising anytime soon (ie. decades). Government and personal debt is just too high to allow a true normalization of rates. The gas pedal has been held down for too long, and demographics are adding to the mess in most of the developed world. In essence, we are all Japan now.

If this is true, what strategy would you recommend for Millennials or Genx'rs who are going to spend the most time in this environment (potentially most of their savings lives)? Is index investing really the solution? If someone had access to investing in hedge funds, private equity, IPOs or real estate, would this be a better strategy in this new environment?

What do you think?

Assuming this author is correct

http://business.financialpost.com/personal-finance/family-finance/why-interest-rates-will-remain-low-and-what-that-means-for-your-retirement-security

StacheEngineer

  • 5 O'Clock Shadow
  • *
  • Posts: 46
Re: Index Investing in a Permanently Low Interest Environment
« Reply #1 on: October 04, 2015, 01:25:22 PM »
I'm not sure how to turn this into a workable investment strategy but the correct option would seem to be take advantage of historically low interest rates and become a borrower.

Another option would be to borrow short-term and buy long-term bonds. Current short term rates are ~0.25% and 30 year bond yields are 2.82%. If you expect short term rates to stay below say 1.5% over the next 30 years, you can use leverage to make ~1% on the spread.

Left

  • Handlebar Stache
  • *****
  • Posts: 1157
Re: Index Investing in a Permanently Low Interest Environment
« Reply #2 on: October 04, 2015, 01:39:19 PM »
I use a put option fund for dividend like returns, might not be the best but the pension should take the place of bonds for most purposes. I also have a paid off annuity. Yes it isn't a lot but better than nothing if push comes to shove... I didn't choose the annuity since it is bad investment in my eyes, but grandparents took it out for each kid/grandkid when we were born, so they are paid off now and just indexed to the stock market and growing until we draw on it.

The puts fund pays out around $0.35/share bimonthly. But I'm just experimenting with it so don't take it as a good strategy. I have no idea what a low interest does to puts. I just figured if markets are flat, it pays out well and if markets are up, my stocks are up so I won't care for the put returns as much. Again just play/fun money that I'm not looking for high returns on.
« Last Edit: October 04, 2015, 01:53:03 PM by eyem »

sol

  • Walrus Stache
  • *******
  • Posts: 8457
  • Age: 44
  • Location: Pacific Northwest
Re: Index Investing in a Permanently Low Interest Environment
« Reply #3 on: October 04, 2015, 01:50:23 PM »
Increase your savings rate.  For high enough rates, interest returns become less and less significant.  As an example, if you can save 90% of your income while living off of the other 10%, then you can save up 25x expenses in less than three years even with 0% returns.

Investment returns are for people who save pitifully small amounts of money over many decades.  Big savers are less concerned.

Left

  • Handlebar Stache
  • *****
  • Posts: 1157
Re: Index Investing in a Permanently Low Interest Environment
« Reply #4 on: October 04, 2015, 01:54:11 PM »
Increase your savings rate.  For high enough rates, interest returns become less and less significant.  As an example, if you can save 90% of your income while living off of the other 10%, then you can save up 25x expenses in less than three years even with 0% returns.

Investment returns are for people who save pitifully small amounts of money over many decades.  Big savers are less concerned.
my concern is what happens AFTER I retire? Then the return rates would be important.

I get that returns aren't that important while saving but it is once you aren't

vhalros

  • Bristles
  • ***
  • Posts: 308
Re: Index Investing in a Permanently Low Interest Environment
« Reply #5 on: October 04, 2015, 02:25:57 PM »
I guess in such an environment owning rental properties is a little more tempting?

sol

  • Walrus Stache
  • *******
  • Posts: 8457
  • Age: 44
  • Location: Pacific Northwest
Re: Index Investing in a Permanently Low Interest Environment
« Reply #6 on: October 04, 2015, 02:28:30 PM »
I get that returns aren't that important while saving but it is once you aren't

Save a little more?  The usual rule of thumb is to save 25x for a 30 year retirement, to protect against volatile investment returns.  Invest at 0% and you instead need 30x for 30 years.

The presumption here is that low% returns are associated with low% inflation, which is historically pretty accurate but I'm not sure it's required going forward.  I suppose it's possible for returns to be zero but inflation to be high, but that's a scenario that involves the complete collapse of the entire American economy and in that case we'll all have bigger problems to worry about.

Apocalyptica602

  • Bristles
  • ***
  • Posts: 281
Re: Index Investing in a Permanently Low Interest Environment
« Reply #7 on: October 04, 2015, 03:42:56 PM »
This is certainly a concern, but also keep in mind that you just need to do 'better than most'.

Your returns may be less than ideal, but if your savings rate is high enough and you have 25x+ annual expenses in diversified (read: RE, bonds, etc. not even just index funds). You should be okay.

If low interest rates aren't coupled with low inflation and inflation rises enough where it's worrysome enough for YOU, to put your mustachian retirement in jeopardy... there will be torches and pitchforks in the streets filled with the general consumer sukkas of the world.

nereo

  • Senior Mustachian
  • ********
  • Posts: 15089
  • Location: Just south of Canada
    • Here's how you can support science today:
Re: Index Investing in a Permanently Low Interest Environment
« Reply #8 on: October 04, 2015, 03:48:12 PM »
Increase your savings rate.  For high enough rates, interest returns become less and less significant.  As an example, if you can save 90% of your income while living off of the other 10%, then you can save up 25x expenses in less than three years even with 0% returns.

Investment returns are for people who save pitifully small amounts of money over many decades.  Big savers are less concerned.
Sol - a very potent point you just brought up, and I've never thought about it in that way before....  - if you're able to save a large percentage (say ≥2x future spending per year) rates of returns become relatively unimportant.

To put this into a mathematical example, let's say you wanted a 'stach of $800k giving you $32k/year at a 4% WR.  If you can save $64,000/year* (2x future spending) then the differences look like this (returns annualized):
2% return:   11.1 years
4% return:   10 years
5% return:   9.6 years
6% return    9.2 years
7% return:   8.8 years
8% return:   8.5 years
10% return: 8 years
12% return: 7.5 years
15% return: 7 years (and laughably optimistic)

So - the difference for this very high saver between a dismal 4% return and a steller 10% return is only two years.

* for a 'reality check' this would be analogous to a couple earning $100k/year post-tax saving about 64% of their income and living off of $36k, which would not be considered uncommon on this forum.  It could be a dual income family maxing out their 401(k)s, IRAs and contributing $1,400/month towards other savings.

Tyler

  • Handlebar Stache
  • *****
  • Posts: 1175
Re: Index Investing in a Permanently Low Interest Environment
« Reply #9 on: October 04, 2015, 04:29:02 PM »
Bonds may stay low for a while, but they never sit still.  So one solution is to focus not so much on income strategies but on rebalancing uncorrelated assets.  For example, long term treasury prices are pretty volatile and are more uncorrelated from the stock market than corporate bonds.  Balanced with stocks (and even better -- with a few other assets as well), even at low interest rates and high stock valuations the normal gyrations of the stock and bond markets allow for profit opportunities by simply sitting back and rebalancing periodically.  The Permanent Portfolio and Ivy portfolio are pretty good examples of this, IMHO. 

Left

  • Handlebar Stache
  • *****
  • Posts: 1157
Re: Index Investing in a Permanently Low Interest Environment
« Reply #10 on: October 04, 2015, 05:06:59 PM »
seems like there is a fair share of govt workers on here... the G fund does wonders still... yes low rates but won't lose out on anything

another option is to buy i-bonds. After 20 years, they are guaranteed to double in value. So  using the rule of 72, it gets 3.6% returns each year to double at 20 years. Unless the government changes the rules, that's a set "known" return. It's popular for a reason :S Same with TIPS. But both options are "low" yielding compared to stocks.

Low interest would also help rentals/reits as well. Maybe more people will invest in real estate since it makes mortgages easier to pay on?

mrteacher

  • Stubble
  • **
  • Posts: 219
Re: Index Investing in a Permanently Low Interest Environment
« Reply #11 on: October 04, 2015, 05:07:37 PM »
Replying to follow. Interested in hearing insightful remarks from forum members with more knowledge and I have.

Murse

  • Pencil Stache
  • ****
  • Posts: 564
Re: Index Investing in a Permanently Low Interest Environment
« Reply #12 on: October 04, 2015, 05:17:53 PM »
For arguments sake, forget it. You and I cannot predict the market. Best advice is the same as always, diversify.

johnny847

  • Magnum Stache
  • ******
  • Posts: 3190
    • My Blog
Re: Index Investing in a Permanently Low Interest Environment
« Reply #13 on: October 04, 2015, 05:42:38 PM »
seems like there is a fair share of govt workers on here... the G fund does wonders still... yes low rates but won't lose out on anything

another option is to buy i-bonds. After 20 years, they are guaranteed to double in value. So  using the rule of 72, it gets 3.6% returns each year to double at 20 years. Unless the government changes the rules, that's a set "known" return. It's popular for a reason :S Same with TIPS. But both options are "low" yielding compared to stocks.

Low interest would also help rentals/reits as well. Maybe more people will invest in real estate since it makes mortgages easier to pay on?

You're thinking of EE bonds not I bonds. I bonds are the ones that will at least keep up with inflation, tracked semiannually (as opposed to TIPS which tracks inflation daily IIRC)

Left

  • Handlebar Stache
  • *****
  • Posts: 1157
Re: Index Investing in a Permanently Low Interest Environment
« Reply #14 on: October 04, 2015, 06:15:29 PM »
seems like there is a fair share of govt workers on here... the G fund does wonders still... yes low rates but won't lose out on anything

another option is to buy i-bonds. After 20 years, they are guaranteed to double in value. So  using the rule of 72, it gets 3.6% returns each year to double at 20 years. Unless the government changes the rules, that's a set "known" return. It's popular for a reason :S Same with TIPS. But both options are "low" yielding compared to stocks.

Low interest would also help rentals/reits as well. Maybe more people will invest in real estate since it makes mortgages easier to pay on?

You're thinking of EE bonds not I bonds. I bonds are the ones that will at least keep up with inflation, tracked semiannually (as opposed to TIPS which tracks inflation daily IIRC)
sorry, you're right, I had them flipped :D

Telecaster

  • Magnum Stache
  • ******
  • Posts: 2610
  • Location: Seattle, WA
Re: Index Investing in a Permanently Low Interest Environment
« Reply #15 on: October 04, 2015, 06:38:26 PM »
my concern is what happens AFTER I retire? Then the return rates would be important.

I get that returns aren't that important while saving but it is once you aren't

Maybe.  Maybe not.   We're concerned with the real rate of return, that is the return rate minus the inflation rate.   Bonds are tradeable financial instruments.  In other words, the price is set by the market.  Over the last 100 years, bonds earned roughly 2% over the inflation rate.   So that seems to be roughly the risk premium that traders demand in exchange for owning the bonds.   Some variation in there.  In the 1970s when inflation was raging, bond rates were below the inflation rate (and bond holders took it on the chin), and in the 1980 bond buyers demanded large risk premiums. 

Right now, bonds are earning roughly 2% over the inflation rate, maybe a bit on the low side of that.   So while interest rates themselves are very low, bond rates seem to be in the realm of reality. 




Ricky

  • Pencil Stache
  • ****
  • Posts: 842
Re: Index Investing in a Permanently Low Interest Environment
« Reply #16 on: October 04, 2015, 06:48:44 PM »
I'm a millennial and personally will be focusing strictly on buy and hold real estate. The fact is, there aren't too many lucrative deals out there for the average joe looking to make an investment today. But, real estate is usually the lesser of all the evils as it requires more work and research and you can create value.

Left

  • Handlebar Stache
  • *****
  • Posts: 1157
Re: Index Investing in a Permanently Low Interest Environment
« Reply #17 on: October 04, 2015, 06:49:50 PM »
about that... WHY would inflation rates matter in cases of MMM and people who retire and grow their own things/homesteading?

Inflation is measured against the CPI (from what google said), meaning consumer prices... for folks on MMM who consume little, or homesteaders who grow  most of their food items and such, does inflation matter? I mean yes, it gets more expensive, but if you don't buy it often/spend much to begin with, it seems like it going up some each year wouldn't be noticeable too much.

So even if "real return" is exactly the same as inflation, does it make a difference to us, I mean yes I don't like it, but no difference if it is 3% or 5% to me, I don't see much need to stress over it. I mean, outside of waitresses seeming to think they deserve 20% tips instead of the standard 10% tip, that's pretty much the only time I "see" a difference. I know prices go up like food/gas, but not enough to the point that I care, it doesn't seem to hurt my wallet anyways.

I mean, I've "built" in wiggle room in my FI plans, so even if I return below inflation, I'd be fine until it recovers again. But my FI plans for having 2x what I need... a lot of wiggle room
« Last Edit: October 04, 2015, 06:51:52 PM by eyem »

BigBangWeary

  • Stubble
  • **
  • Posts: 117
    • The Great Canadian Housing Bubble Co.
Re: Index Investing in a Permanently Low Interest Environment
« Reply #18 on: October 05, 2015, 03:53:21 AM »
Thanks for the input everyone!

Here in Canada there is a question around whether the rapid increase in property values will continue going forward. Certainly, if one bought pre-2008 in most major markets here they are laughing. Going forward ... not so sure. Price-to-income, price-to-rent, etc. etc. all flashing red in most markets. So investing for capital gains is a risk.

When it comes to purchasing property for income here, finding something that is cash-flow positive right now is getting hard.

The same is arguably true when it comes to buying the market (indexing). The taps were turned on in 2008 and buoyed a lot of things. If you were in before, great, you have made a large profit. The question is, now that the taps are being turned off, where is the return? The markets are addicted to cheap credit.

The markets are begging the Fed not raise rates. If they listen, we stay buoyed for a bit longer. If they do raise rates, all bets are off. When markets responded to things like earnings buy-and-hold made a lot of sense. Some part of me feels these really are new times and some kind of new strategy is needed.

Keeping in mind most Mustachians don't intend to wait 35+ years before living partially off their stash.

Ricky

  • Pencil Stache
  • ****
  • Posts: 842
Re: Index Investing in a Permanently Low Interest Environment
« Reply #19 on: October 05, 2015, 05:33:46 AM »
Here in Canada there is a question around whether the rapid increase in property values will continue going forward. Certainly, if one bought pre-2008 in most major markets here they are laughing. Going forward ... not so sure. Price-to-income, price-to-rent, etc. etc. all flashing red in most markets. So investing for capital gains is a risk.

When it comes to purchasing property for income here, finding something that is cash-flow positive right now is getting hard.

No one is forcing you to buy property in Canada. You can buy property anywhere in the world.

nereo

  • Senior Mustachian
  • ********
  • Posts: 15089
  • Location: Just south of Canada
    • Here's how you can support science today:
Re: Index Investing in a Permanently Low Interest Environment
« Reply #20 on: October 05, 2015, 05:52:12 AM »
Here in Canada there is a question around whether the rapid increase in property values will continue going forward. Certainly, if one bought pre-2008 in most major markets here they are laughing. Going forward ... not so sure. Price-to-income, price-to-rent, etc. etc. all flashing red in most markets. So investing for capital gains is a risk.

When it comes to purchasing property for income here, finding something that is cash-flow positive right now is getting hard.

No one is forcing you to buy property in Canada. You can buy property anywhere in the world.

Also - Canada is a large geographical country with 35MM people.  If you're finding it hard to find a cash-flow positive property here you're looking too narrowly. 

Seppia

  • Pencil Stache
  • ****
  • Posts: 616
  • Age: 41
  • Location: NYC
Re: Index Investing in a Permanently Low Interest Environment
« Reply #21 on: October 05, 2015, 06:12:37 AM »
Yes for the little I've seen in Toronto, property prices in Canada seem insane.
Stocks in the us (except for energy sector) are also very high.
Nobody knows where both will go (they could go even significantly higher), but it doesn't seem like a bad idea to diversify and own some European stock for example.

In general though human beings tend to excessively extrapolate recent events and assume they will last forever (so since 2008: interest rates at zero, no inflation), but history says when something is well outside of the norm, it is more probable than not that in the mid to long term they will revert to closer to historical averages.

nereo

  • Senior Mustachian
  • ********
  • Posts: 15089
  • Location: Just south of Canada
    • Here's how you can support science today:
Re: Index Investing in a Permanently Low Interest Environment
« Reply #22 on: October 05, 2015, 08:08:11 AM »
Yes for the little I've seen in Toronto, property prices in Canada seem insane.
Stocks in the us (except for energy sector) are also very high.
Wow... just ... wow.  You cannot characterize a country as large as Canada simply by looking at the property prices in Toronto.  It would be like looking at rentals in Manhattan and concluding that "$2,000/mo seems typical for an apartment in the United States". 


Along the same lines... there are 3k+ publicly traded stocks in the US.  Sure, a stock index like the SP500 might be very high (and whether this is the case is certainly debatable) but saying "stocks in the US (except for energy sector) are also very high" is a ridiculous oversimplification and stereotype. 

Seppia

  • Pencil Stache
  • ****
  • Posts: 616
  • Age: 41
  • Location: NYC
Re: Index Investing in a Permanently Low Interest Environment
« Reply #23 on: October 05, 2015, 08:25:51 AM »

Yes for the little I've seen in Toronto, property prices in Canada seem insane.
Stocks in the us (except for energy sector) are also very high.
Wow... just ... wow.  You cannot characterize a country as large as Canada simply by looking at the property prices in Toronto.  It would be like looking at rentals in Manhattan and concluding that "$2,000/mo seems typical for an apartment in the United States". 


Along the same lines... there are 3k+ publicly traded stocks in the US.  Sure, a stock index like the SP500 might be very high (and whether this is the case is certainly debatable) but saying "stocks in the US (except for energy sector) are also very high" is a ridiculous oversimplification and stereotype.

Which part of "FOR THE LITTLE IVE SEEN.... they SEEM" didn't you get exactly?

Regarding stocks, did you happen to miss that probably 90%+ of the users here trade mainly if not exclusively indexes like VTSAX?

Of course these are general statements, but it seems pretty normal to discuss in broad terms.

Jesus man, chill.

nereo

  • Senior Mustachian
  • ********
  • Posts: 15089
  • Location: Just south of Canada
    • Here's how you can support science today:
Re: Index Investing in a Permanently Low Interest Environment
« Reply #24 on: October 05, 2015, 08:33:25 AM »

Yes for the little I've seen in Toronto, property prices in Canada seem insane.
Stocks in the us (except for energy sector) are also very high.
Wow... just ... wow.  You cannot characterize a country as large as Canada simply by looking at the property prices in Toronto.  It would be like looking at rentals in Manhattan and concluding that "$2,000/mo seems typical for an apartment in the United States". 


Along the same lines... there are 3k+ publicly traded stocks in the US.  Sure, a stock index like the SP500 might be very high (and whether this is the case is certainly debatable) but saying "stocks in the US (except for energy sector) are also very high" is a ridiculous oversimplification and stereotype.

Which part of "FOR THE LITTLE IVE SEEN.... they SEEM" didn't you get exactly?

Yes... but that's exactly my point.  Essentially you're saying 'I've only seen a terribly small cross-section, but I'm going to extrapolate anyway".  It's ridiculous and not at all helpful.  Suppose I said "I've only met six black people, but from what I've seen they're all tall and enjoy drinking PBR."   See how stupid that sounds?

Quote
Of course these are general statements, but it seems pretty normal to discuss in broad terms.
This isn't talking in broad terms.  It's taking a the extreme example, the statistical outlier and generalizing around that example.   Of course I'm going to call someone out when they try to equate Toronto as being similar to the rest of Canada, just as I'd call someone out for thinking Manhattan was typical for the entirety of the United States.

acroy

  • Handlebar Stache
  • *****
  • Posts: 1699
  • Age: 44
  • Location: Dallas TX
    • SWAMI
Re: Index Investing in a Permanently Low Interest Environment
« Reply #25 on: October 05, 2015, 09:26:16 AM »
Ok, for arguments sake, lets assume interest rates are not going to be rising anytime soon (ie. decades). Government and personal debt is just too high to allow a true normalization of rates. The gas pedal has been held down for too long, and demographics are adding to the mess in most of the developed world. In essence, we are all Japan now......
http://business.financialpost.com/personal-finance/family-finance/why-interest-rates-will-remain-low-and-what-that-means-for-your-retirement-security
I agree 100%;
Too often we hear the words ‘this time it’s different’ to justify a wild bubble or something. But this time it is different.
-the world governments (almost all of them) have assumed an enormous amount of debt – unprecedented. This limits the ability to raise rates, as they can’t afford to roll over the old debt at higher rates.
-Currency war; ‘race to the bottom’ as the major currencies attempt to undercut each other. This has happened before, but not often. The results are disruptive.
-Aging global population and slowing population growth – unprecedented. There are no more ‘growth engines’, no more untapped Chinas to come on-line.

What the results will be is anyone’s guess. However I suspect what will happen is:
-Low, Zero, or Negative interest rates as Central banks continue to attempt to drive growth despite deflationary pressures
-Some savers will suffer (i.e. Japan), mostly in import-dependant countries, if their currency is successfully inflated relative to the rest of the world
-Deflationary pressures: food, energy gets cheaper as commodity demand slows or declines (seen a lot of this already)
-‘Stagnant’ economy. Not necessarily a bad thing: it can still be strong, profitable, and have good investment choices. But we are so hard-wired to drive for ‘growth’ that anything other than ‘growth’ is ‘bad’. We will eventually discover (as Europe, Japan, have already, they just don’t admit it) that economic activity will ‘right-size’ itself.

How to invest/profit from this:
-No idea. Medical care industry ‘should’ do very well due to demand, but it’s so expensive already and so entrenched in politics it’s a complex analysis.
-the ‘rentier’ business should be fine. REITs are my preferred way to get property exposure.

Personally I’m more or less ‘staying the course’ of primarily index investing combined with some REIT and other dividend investments. I suspect we’ll eventually see rising dividends (more in line with historical trends) as companies have to do something with their money. There has been minimal corporate investment for a long time, the profit has been going largely into stock buybacks which is helping lift equity prices. This is way above the trendline and will not last forever.

That’s all my crystal ball is telling me.

TL/DR: ask your dog.


Left

  • Handlebar Stache
  • *****
  • Posts: 1157
Re: Index Investing in a Permanently Low Interest Environment
« Reply #26 on: October 05, 2015, 09:42:19 AM »
couldn't they increase interest rates and offset it with higher tax rates?

right now it seems like the top companies have a lot of their wealth overseas because they don't want to repatriate it to avoid tax. With it being low already and them still not bringing it back to US, why keep it low anyways?

Why not make FATCA apply to corporations as well? Then let them decide if they want to be deal with US market or not. Sure it hurts but they don't have a better market right now. Europe isn't growing, China sure, but then they have to hand over their company to china...

Seppia

  • Pencil Stache
  • ****
  • Posts: 616
  • Age: 41
  • Location: NYC
Re: Index Investing in a Permanently Low Interest Environment
« Reply #27 on: October 05, 2015, 09:51:20 AM »

Yes... but that's exactly my point.  Essentially you're saying 'I've only seen a terribly small cross-section, but I'm going to extrapolate anyway".  It's ridiculous and not at all helpful.  Suppose I said "I've only met six black people, but from what I've seen they're all tall and enjoy drinking PBR."   See how stupid that sounds?


Whatever man. Go buy your real estate in Canada, knock yourself out!

Oh I see you conveniently avoid the part on stocks.

nereo

  • Senior Mustachian
  • ********
  • Posts: 15089
  • Location: Just south of Canada
    • Here's how you can support science today:
Re: Index Investing in a Permanently Low Interest Environment
« Reply #28 on: October 05, 2015, 10:03:44 AM »

Yes... but that's exactly my point.  Essentially you're saying 'I've only seen a terribly small cross-section, but I'm going to extrapolate anyway".  It's ridiculous and not at all helpful.  Suppose I said "I've only met six black people, but from what I've seen they're all tall and enjoy drinking PBR."   See how stupid that sounds?


Whatever man. Go buy your real estate in Canada, knock yourself out!

Oh I see you conveniently avoid the part on stocks.
well now i'm fairly certain I'm just being trolled.  I own property in Canada and the United States.  And for full disclosure (and as anyone around here who's familiar with my posts knows) the majority of my assets are kept in a low-cost index fund (Vanguard's VFIAX).  Whether you own individual stocks or a broad market index fund (as most people here do) the current perceived valuation of the market isn't very important when your investing timeline is several decades. 

acroy

  • Handlebar Stache
  • *****
  • Posts: 1699
  • Age: 44
  • Location: Dallas TX
    • SWAMI
Re: Index Investing in a Permanently Low Interest Environment
« Reply #29 on: October 05, 2015, 11:57:57 AM »
couldn't they increase interest rates and offset it with higher tax rates?

right now it seems like the top companies have a lot of their wealth overseas because they don't want to repatriate it to avoid tax. With it being low already and them still not bringing it back to US, why keep it low anyways?
............
Yes in theory, but raising taxes is political suicide.

The amount of wealth overseas is not enough to put a dent in Govt debt. There's something like 2.5T overseas. Assuming Uncle Sam could somehow tax that at 25% (generous!) that'd be $625 Billion. Fed annual spend is closing in on $4 trillion/yr. It would be a nice year but not solve the  systemic problem: decades of deficit spending.

Rosy

  • Magnum Stache
  • ******
  • Posts: 2554
  • Location: Florida
Re: Index Investing in a Permanently Low Interest Environment
« Reply #30 on: October 05, 2015, 01:01:38 PM »
acroyd
Quote
What the results will be is anyone’s guess. However I suspect what will happen is:
-Low, Zero, or Negative interest rates as Central banks continue to attempt to drive growth despite deflationary pressures

Negative interest rates? - How is that even possible? Does that mean one day I have 10K saved up in my bank account and by next month's statement it is reduced by 1%?

I saw somewhere else online, where negative interest rates were mentioned along with a sort of freeze on cash.

That would be a de-valuation of our currency - like in Germany, one night you had $30K and the next morning the currency when the banks re-opened it was devaluated down to $300. Is this just a slower approach, but the same idea?

Jags4186

  • Pencil Stache
  • ****
  • Posts: 594
Re: Index Investing in a Permanently Low Interest Environment
« Reply #31 on: October 05, 2015, 02:17:15 PM »
acroyd
Quote
What the results will be is anyone’s guess. However I suspect what will happen is:
-Low, Zero, or Negative interest rates as Central banks continue to attempt to drive growth despite deflationary pressures

Negative interest rates? - How is that even possible? Does that mean one day I have 10K saved up in my bank account and by next month's statement it is reduced by 1%?

I saw somewhere else online, where negative interest rates were mentioned along with a sort of freeze on cash.

That would be a de-valuation of our currency - like in Germany, one night you had $30K and the next morning the currency when the banks re-opened it was devaluated down to $300. Is this just a slower approach, but the same idea?

The government can set interest rates negative to really encourage the banks (i.e. force their hand) to lend money.  Otherwise the banks would be forced to pay to hold capital.  Rates in Switzerland were negative (not sure if they still are) earlier this year.  This would be a last ditch effort to try and force inflation.

If you're referring to Weimer Germany they experienced massive inflation.  What cost $1 today cost $10 tomorrow $100 on Wednesday and by Sunday it was $1,000,000.  They just slashed 0s off their currency, but it was already worthless.
« Last Edit: October 05, 2015, 02:20:44 PM by Jags4186 »

Left

  • Handlebar Stache
  • *****
  • Posts: 1157
Re: Index Investing in a Permanently Low Interest Environment
« Reply #32 on: October 05, 2015, 02:54:23 PM »
Forget which country but last summer they had a negative interest rate so people got paid for having a mortgate

Telecaster

  • Magnum Stache
  • ******
  • Posts: 2610
  • Location: Seattle, WA
Re: Index Investing in a Permanently Low Interest Environment
« Reply #33 on: October 05, 2015, 03:16:34 PM »
couldn't they increase interest rates and offset it with higher tax rates?

Depends on who you mean by "they"  :)   The Federal Reserve has nothing to do with taxes.  Congress, which has everything to do with taxes, has nothing to do with interest rates.   That's why I don't buy theories that the Fed is holding down interest rates because they are worried about debt service.  That's not what the Fed worries about. 

Another reason is what you hinted at.  If taxes were raised to the same levels they were in the 1990s, the deficit would be virtually gone.   It is a problem, but one with a solution.

And finally, what happens to the value if all those bonds and bills if interest rates go up?  Hint:  The value of the debt goes down as interest rates go up.




Indexer

  • Handlebar Stache
  • *****
  • Posts: 1463
Re: Index Investing in a Permanently Low Interest Environment
« Reply #34 on: October 05, 2015, 03:22:40 PM »
acroyd
Quote
What the results will be is anyone’s guess. However I suspect what will happen is:
-Low, Zero, or Negative interest rates as Central banks continue to attempt to drive growth despite deflationary pressures

Negative interest rates? - How is that even possible? Does that mean one day I have 10K saved up in my bank account and by next month's statement it is reduced by 1%?

If your options are earning 1% or losing 1% you will take earning 1% every time. However if your option is losing 1% or losing 20% you will take losing 1% every time. It is all relative.

During the craziness with Greece people in Europe were happy to have -0.01% interest rates owning safe German or Swiss bonds. The alternative in some people's minds was owning Greek, Spanish, or Italian bonds that 'could' have went to 0. A 100% chance of losing 0.01% or a 0.01% chance of losing 100%. Fearful people will openly take the 100% chance of a 0.01% loss. Honestly that is what people do every time they park too much in cash.  Honestly what is the difference between a 0.01% return and a -0.01% return?  Once you adjust for inflation they are both almost identical.

Left

  • Handlebar Stache
  • *****
  • Posts: 1157
Re: Index Investing in a Permanently Low Interest Environment
« Reply #35 on: October 05, 2015, 03:23:22 PM »
Quote
And finally, what happens to the value if all those bonds and bills if interest rates go up?  Hint:  The value of the debt goes down as interest rates go up.
care to explain this to me?

I know people sell their bonds when interest rates go up, but that is on the secondary market... how does that decrease the actual debt from when it was issued?

IE if I bought the bond and interest rates go up, I can either hold it to maturity and collect a lower payment, or sell it at a loss, but it doesn't mean the price I originally paid for it went down

Jack

  • Magnum Stache
  • ******
  • Posts: 4726
  • Location: Atlanta, GA
Re: Index Investing in a Permanently Low Interest Environment
« Reply #36 on: October 05, 2015, 03:31:50 PM »
Quote
And finally, what happens to the value if all those bonds and bills if interest rates go up?  Hint:  The value of the debt goes down as interest rates go up.
care to explain this to me?

I know people sell their bonds when interest rates go up, but that is on the secondary market... how does that decrease the actual debt from when it was issued?

IE if I bought the bond and interest rates go up, I can either hold it to maturity and collect a lower payment, or sell it at a loss, but it doesn't mean the price I originally paid for it went down

The dollar amount of the debt is the same, but the buying power the creditor gets from the interest (i.e., the actual value) is lower.

If you lend me $100K to buy a house, then hyperinflation happens and I pay back the loan with $100k that's just enough for you to buy a loaf of bread, would you say you lost value on the deal?

Left

  • Handlebar Stache
  • *****
  • Posts: 1157
Re: Index Investing in a Permanently Low Interest Environment
« Reply #37 on: October 05, 2015, 03:51:09 PM »
but hyperinflation only happens when they introduce a lot of new money.

increasing interest rates doesn't do that or does it? My thought was that the rate would go up, people would "invest" that money and they would "lend" that money back out, so no new money is created, or not much

zimbabwe has hyper inflation and about a 14% interest rate... these ones have higher http://www.investmentfrontier.com/2015/04/13/where-are-the-highest-interest-rates-in-the-world/ without hyperinflation
« Last Edit: October 05, 2015, 03:54:21 PM by eyem »

Telecaster

  • Magnum Stache
  • ******
  • Posts: 2610
  • Location: Seattle, WA
Re: Index Investing in a Permanently Low Interest Environment
« Reply #38 on: October 05, 2015, 04:07:04 PM »
Quote
And finally, what happens to the value if all those bonds and bills if interest rates go up?  Hint:  The value of the debt goes down as interest rates go up.
care to explain this to me?

I know people sell their bonds when interest rates go up, but that is on the secondary market... how does that decrease the actual debt from when it was issued?

IE if I bought the bond and interest rates go up, I can either hold it to maturity and collect a lower payment, or sell it at a loss, but it doesn't mean the price I originally paid for it went down

Right, but that's sort of my point.  Let's say I sell you a bond for $800 that's worth $1000 at maturity.   Inflation goes up, so now in order to get the same yield the bond is only worth $600.    You're right, I still am on the hook for $1000, but even though interest rates went up, my debt didn't.   And in theory, I could buy back that bond for less than I sold it for.   


Rosy

  • Magnum Stache
  • ******
  • Posts: 2554
  • Location: Florida
Re: Index Investing in a Permanently Low Interest Environment
« Reply #39 on: October 05, 2015, 05:33:01 PM »
acroyd
Quote
What the results will be is anyone’s guess. However I suspect what will happen is:
-Low, Zero, or Negative interest rates as Central banks continue to attempt to drive growth despite deflationary pressures

Negative interest rates? - How is that even possible? Does that mean one day I have 10K saved up in my bank account and by next month's statement it is reduced by 1%?

I saw somewhere else online, where negative interest rates were mentioned along with a sort of freeze on cash.

That would be a de-valuation of our currency - like in Germany, one night you had $30K and the next morning the currency when the banks re-opened it was devaluated down to $300. Is this just a slower approach, but the same idea?

The government can set interest rates negative to really encourage the banks (i.e. force their hand) to lend money.  Otherwise the banks would be forced to pay to hold capital.  Rates in Switzerland were negative (not sure if they still are) earlier this year.  This would be a last ditch effort to try and force inflation.

If you're referring to Weimer Germany they experienced massive inflation.  What cost $1 today cost $10 tomorrow $100 on Wednesday and by Sunday it was $1,000,000.  They just slashed 0s off their currency, but it was already worthless.

Negative interest is a mindboggling concept.
I did not know about Switzerlands banks, that is disturbing. I had come across a site that said there would be a cash shortage and then mentioned the coming negative interest and I was trying to reconcile that information with your statement.

"If you're referring to Weimer Germany they experienced massive inflation."
Yes - I confused all these issues, but you are right, the Weimar Republic was true inflation, printing more money until it was worthless.