Are Prolonged Low Interest Rates Good or Bad?
Market and Economic Update – Week Ended 29th March 2019
Peter Flannery CFP AFA
“If you have one economist on your team,
it’s likely that you have one more than you’ll need.”
Warren Buffett
The Markets
The left side chart shows the Dow Jones index (the US market), which is down over the last month. The right side chart shows the NZX index (the New Zealand share market), which is up over the last month.
Trading prices rise, trading prices decline. Nothing new here. Perhaps what matters though is how you respond to those movements. If you are happy when prices rise but then become unhappy when prices decline, it is likely that you and I should have a talk.
Remember, trading prices are determined by the mood of the market – market sentiment (the voting machine).
We are investing in the underlying business.
Unnecessary emotions around unpredictable sentiment that cannot be controlled is illogical – don’t you think?
The left hand chart is a diagram outlining how business cycles rise and fall and also that markets grow and expand (the light blue line). The chart on the right details some of the drivers of market cycle booms and busts.
There remains an air of uncertainty across the markets, as the media noise around slowing global economic growth continues to ramp up. Last week, (under The Economic Update section) I highlighted the length of the current economic expansion in the US. Without doubt, we are late in the cycle. One important point worth mentioning is that those charts above make it appear as though market cycles are an orderly rhythm that can be predicted – not so. Indeed, markets are a random walk.
Synchronised central bank intervention is an ongoing theme that continues to moderate market prices (property prices and share market prices). That is partly why we have not seen the volatility that was a regular feature of markets and investing prior to 2008. Central bank intervention has been going on around the world for longer than that, but has been having a significant impact since 2008, as the number and application of macro prudential tools (governments “printing money”) along with the scale of those activities has increased. I remember back in the day, that every four years, there was a market correction and the cycle was repeated quite regularly (roughly three years up, one year down).
Since 2008, central bank intervention has distorted that market cycle. Frustratingly, prices remain generally expensive, although not in bubble territory. There is still opportunity, however we need to bear in mind that we are late in the cycle as evidenced by a very flat yield curve (long term interest rates and short term interest rates almost at the same level – in the US) along with reasonably strong consumer confidence, strong company earnings, increasing uncertainty and so on.
I hasten to add that we, as Value Investors, are not limited by market cycles, nor do we rely on markets playing nice, to be able to invest and go about growing our wealth. We do need to be mindful of pricing because, I am not sure about you but, I do not like paying too much for investments if I can avoid it. Sure, there are always examples of investments that we did not invest in, whose prices continue to rise, rise and rise ever higher. We could have just invested anyway and ignored those expensive prices looking back. I have learned though, that if we want to just chase market prices, there are simple ways to go about this, which ultimately provide us with little control over our investment outcomes. That is the way most invest. Ideally, a strong market pricing correction would open up a number of opportunities for us. In the absence of that, we need to be mindful that investing now means paying more than we should. Still though, opportunity exists, even if it is more difficult to locate.
ECONOMIC UPDATE
Interest rates remain low, in some cases at historic lows. What does this mean?
A prolonged period of low interest rates tell us that deflation is close by. To save time, I will not detail the number of central banks that have recently either placed interest rates on hold or are considering lowering them. This is pretty much happening across the board.
As investors, this may put pressure on trading prices (markets and the cash up value of your portfolio) at some point. Nothing to be concerned about, of course, because the lower prices decline, the more the value emerges. You just have to be “at one” with that process, if you know what I mean?
The weekly Market and Economic Update this week is more brief than usual due to the Christchurch remembrance service for those 50 who lost their lives two weeks ago. My family and I and the team at WISEplanning are safe and well, but changed forever.
Although in a different way to the 2010 / 2011 earthquakes, the shootings at the Deans Avenue Mosque has defined Cantabrians and other New Zealanders in a way that tough times often do. I know I am not alone when I say that I will not be intimidated. I utterly reject racism and hatred and terrorism. I remain determined to help others, to grow and progress, enjoying that freedom to choose which is so valued and so important.
“We are all like flowers, we are all different. Together, we make up a beautiful garden.”
Survivor – Deans Avenue Mosque shooting, Christchurch