tag:blogger.com,1999:blog-4815867514277794362.post6644714947477546272..comments2024-03-08T06:18:28.125+11:00Comments on Bronte Capital: Some thoughts on very low interest ratesJohn Hemptonhttp://www.blogger.com/profile/03766274392122783128noreply@blogger.comBlogger76125tag:blogger.com,1999:blog-4815867514277794362.post-59513667407990857102016-09-02T18:43:21.944+10:002016-09-02T18:43:21.944+10:00@ John , Worthwhile to consider the fiscal theory ...@ John , Worthwhile to consider the fiscal theory of price levels....<br /><br />https://www.skagenfunds.lu/globalassets/pdfs/miscellaneous/com/prices-and-policies-29.08.2016.pdfDermotnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-51678285108321529972016-08-04T21:05:11.037+10:002016-08-04T21:05:11.037+10:00A wise man once said:
"Nobody can predict in...A wise man once said:<br /><br />"Nobody can predict interest rates, the future direction of the economy, or the stock market. Dismiss all such forecasts and concentrate on what's actually happening to the companies in which you've invested."<br /><br />:)Anonymoushttps://www.blogger.com/profile/12815208263818040840noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-86459509021798124532016-07-28T23:52:43.389+10:002016-07-28T23:52:43.389+10:00The ordinary Chinese don't have much saving, a...The ordinary Chinese don't have much saving, as almost all savings in China are concentrated on the hand of a few (mainly communists and their cronies). The parvenu you guys saw in London and New York are the minority 1% (>10 million, still a huge number).Anonymoushttps://www.blogger.com/profile/16455461122763698353noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-29704830290126053352016-07-28T23:30:20.889+10:002016-07-28T23:30:20.889+10:00Put it this way, perhaps the current economic situ...Put it this way, perhaps the current economic situations, ie low inflation, low interest rate, negative real interest rate and low growth, are something to do with the demographics. <br /><br /><br />The baby boomers, the largest age group in developed countries, have been retiring since 2005. After retirement, they're either spending the reserve they saved before or living on the monthly payment from their pension funds, ie saving rate is negative for them. Meanwhile, those who're going to (but have not yet) retire would increase their saving in the run up to retirement. The interactions of these two forces jointly determine the trend of the supply of saving and labour. <br /><br />On the other hand, the governments in developed countries are generally suffering increasing structural fiscal deficit with payment to retirees outstripping contribution/tax receiving from the working groups in tandem with population aging. They're filling up the deficit with tax hike and debt issued to the central banks and public investors. The governments' demand for credit is rising, and meanwhile entrepreneurs are being discouraged to invest in new projects that create jobs and improve productivity. As such, credit is increasingly channeled to the payment for claims to retirees and asset markets, eg properties and stocks. The piling up public debt will only be paid with new debt issued to central banks or public investors, as the money has been spent on unproductive projects (payment to retirees, asset bubbles), which makes productivity improvement impossible. This set in motion a vicious cycle.<br /><br />The existing dynamics, ie low inflation and low interest rate despite increasing deficit, can sustain itself only because there are so many younger baby boomers who are still working hard and saving more for their retirement. But after this age group retire, inflation will spike and so will interest rate, as the supply of labour and saving will not be enough to keep the system running. Even that, the real interest rate would still be negative, but nominal interest rate and inflation higher.Anonymoushttps://www.blogger.com/profile/16455461122763698353noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-58886782644542414882016-07-28T16:10:03.766+10:002016-07-28T16:10:03.766+10:00This comment has been removed by the author.Anonymoushttps://www.blogger.com/profile/16455461122763698353noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-86336845010423032652016-07-25T07:51:40.717+10:002016-07-25T07:51:40.717+10:00Chinese savings is a strong argument in this direc...Chinese savings is a strong argument in this direction and provides some empirical evidence as well. <br /><br />The one child policy means for every 4 grandparents there is one grandchild. No reasonable Grandparent would assume they would be supported by grandkids. Neither would they rationally assume the chinese state could support them. So they should save very aggressively for their old. An attempt to transfer current consumption into the future. However the Chinese savings market hasnt given you a lot of choice for savings vehicles. instead people have been forced to invest their cash in any old crap. One estimate I saw suggested that real returns were - 5% on real estate investment. However, what alternative do the local population have?<br /><br />I think there is a quote from William Gibson - "The future is already here, its just unevenly distributed". <br /><br />harryhttps://www.blogger.com/profile/03022105095435356782noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-71513931032601706462016-07-19T12:16:25.019+10:002016-07-19T12:16:25.019+10:00Thought provoking. I certainly hope you are wrong....Thought provoking. I certainly hope you are wrong. What gives me hope is the idea that per capita consumption is rising, as enabled by technology (which is deflationary, making real returns possible at negative nominal rates), and technology is owned by equity holders. So we might hope that our expanding knowledge will fuel consumption growth that profits equity holders, so much so that despite countercurrents you describe we prosper nonetheless. If you think about how much progress humanity has made in recent years it doesn't seem too far fetched to believe.Ben Schroedernoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-71997911363539588192016-07-14T06:03:59.724+10:002016-07-14T06:03:59.724+10:00A terrific piece. I work as a pension actuary for...A terrific piece. I work as a pension actuary for retirement plans that in the macro sense are practically "individuals" and they save/defer consumption based on rules imposed and their own preferences, but I have long told people that in the macro, the only way for the Baby Boomers (or anyone else for that matter) to retire at the standard of living they are expecting, someone somewhere has to produce the goods and services they will consume. And, yes, one way to help fix that is more immigration. Another is free (or freer) trade. The UKIPs, Trumps, et al of the world are against both. One reason they don't tell people that it is the same as making pension defaults a policy is that they don't even understand it (or they do and they lie to themselves and/or us about it.)<br /><br />Excellent blog BTW.Anonymoushttps://www.blogger.com/profile/02341294848119357337noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-49885368837752667712016-07-11T02:05:52.221+10:002016-07-11T02:05:52.221+10:00
With BREXIT, I view there are good value investin...<br />With BREXIT, I view there are good value investing opportunities especially in forex play and gold investments. UK property market will be badly hit too due to rising unemployment rate.<br /><br />The way I looked at it, interest rate for uk will be zero if not maintain at current holding. This is needed to boost business and consumer confidence.Value Investorhttp://valueinvestingsingapore.sgnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-82523382439659991652016-07-10T22:35:29.813+10:002016-07-10T22:35:29.813+10:00Bank of England may likely to go zero interest rat...Bank of England may likely to go zero interest rate if not holding to the current rate. Consumer confidence in UK dropped to the lowest in 21 years. Impacts of BREXIT really are just surfacing out...at least for until 2017. We will see a bad hit to the UK property market in the short term at least.Value Investorhttp://valueinvestingsingapore.sgnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-68470214018272178922016-07-06T04:58:06.249+10:002016-07-06T04:58:06.249+10:00I have been in the 'very low for way longer th...I have been in the 'very low for way longer than you think' for about 6 years now. Seems like the 'wealth being eaten by inflation' is playing out more or less globally (UK has had the worst of it).<br /><br />My view however has been bullish on equities: compared to rates I don't think they're cheap. If rates stay this low -- your basic argument -- isn't there a lot of room for equities to run as the market continues to adjust in super slow motion? Even in an environment of flat to negative earnings, it feels like there is a lot of scope for continued multiple expansion.<br /><br />But then again I am not nearly as close to markets as I used to be. WellRednoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-22021836041714126212016-07-01T22:37:52.732+10:002016-07-01T22:37:52.732+10:00No doubt, too many par claims out there. Lots of ...No doubt, too many par claims out there. Lots of disappointment to go around and who knows exactly how it falls. I do know this however - hedge fund managers have no better idea than me and it's impossible to predict who gets it right. Paying 2+20 is a heads they win/tails I lose proposition. Glowing articles will be written about the winners, but it will be totally random.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-82861921513719851132016-07-01T08:45:49.032+10:002016-07-01T08:45:49.032+10:00People have pointed out that savings can be change...People have pointed out that savings can be changed in aggregate by increasing investment and decreasing consumption. But John can simple restate the argument in terms of output, which cannot be deferred in aggregate. <br /><br />But a low real interest rate should lead to more investment, which leads to capital deepening, which increases output per worker (even without productivity growth).jimnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-81169196281356211432016-06-27T19:36:31.247+10:002016-06-27T19:36:31.247+10:00I think you are essentially correct about a number...I think you are essentially correct about a number of assumptions but crucially missing a few insights that will broaden understanding.<br /><br />Firstly, debt is future consumption AND debt is money creation. A loan creates an asset.<br /><br />Baby boomers are no longer creating money as they retire, so they are no longer adding money to the global system. <br /><br />They are also hogging jobs as per data, keeping youth out of the jobs market, reducing the ability of youth to earn a decent wage, and most importantly, "create money" via debt.<br /><br />Furthermore, many youth start their working lives with "negative wealth" from student debt, so they have even less ability to borrow than previous generations.<br /><br />Then at the global financial level, major banks are steadily withdrawing from wholesale eurodollar financing, partly from capital requirements, partly limited ability to make money from low demand because of global corporate austerity to support dividends. <br /><br />This in turn exacerbates youth unemployment because one company's cost saving is another's lost revenue or people's wages.<br /><br />I highly recommend you reading the PDF here: <br />http://www.alhambrapartners.com/2016/06/21/why-qe-will-never-work/<br /><br />and read his other pieces that explain the slump in bank interest rate derivative exposure is a proxy for a collapse in the eurodollar market that the $11 trillion of Fed and other central bank QEs have been hopelessly inadequate to fill.<br /><br />All that has driven global demand for yield and safe assets, but we are now on the verge of Irving Fisher's debt/deflation blackhole.<br /><br />These financial "assets" are underpinned by $200 trillion plus in global debt that needs more and more new money to be created to stop it from imploding. <br /><br />Default is money destruction, so is negative interest rate.<br /><br />The rate of change of money creation is slowing rapidly, and this year was "saved" by China's $1 trillion debt splurge in the first quarter, but they know it cannot continue. The Premier has said as much numerous times.<br /><br />So deflation remains in force and you are right, their will be global default on these assets in one form or another.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-30965187093729759042016-06-27T10:53:49.589+10:002016-06-27T10:53:49.589+10:00A few things to maybe clarify your thinking:
- Ye...A few things to maybe clarify your thinking:<br /><br />- Yes you can defer capital goods expenditures. Look at US auto sales during the recession years. You can also defer expenditures on housing -look at housing starts during the recession. Local Governments can behave pro-cyclically, as they did in the US through the last recession. They fired building inspectors when new construction went away, and now there's a shortage of them, and building completions get delayed.<br /><br />- Who will clean up and remove your bedpan when you are old and infirm? The older old use tremendous amounts of resources in their final years, and there will be more old folks around in some countries than there will be people to care for them. This increase in demand for labor will cause wage increases for service employees.<br /><br />-Again, taking a cue from demographics, older people have more investable funds built from decades of savings from work. There are more of them,and having completed their working lives, they would prefer to earn more on their savings. Unfortunately, markets don't work that way- the boomers will be treated to a combination of lowered investment income until there is a relative shortage of investable funds and higher expenses in their final years as mentioned before. <br /><br />But is that bad? From the perspective of a minimum wage earning worker-no. <br /><br />Besides, I see no other way to achieve equilibrium than reducing unearned income for excess savings and increasing returns to semi-skilled labor as it becomes relatively scarce. This will play out later, when the proportion of boomers that starts hitting 85+ years old increases.<br />Richhttps://www.blogger.com/profile/15333565680808748761noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-20789598560922156552016-06-25T11:27:28.837+10:002016-06-25T11:27:28.837+10:00Dont worry. Case-Deaton suggests there is another ...Dont worry. Case-Deaton suggests there is another equilibration device and its already starting to work. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-35467802228415357832016-06-24T11:57:31.326+10:002016-06-24T11:57:31.326+10:00Great piece. If only our politicians could challen...Great piece. If only our politicians could challenge themselves with this kind of thinking.<br /><br />Yield compression is going to become an increasing issue here at home unless pension funds (and in Australia im talking about our Superfunds) get more creative with their investment strategies. There is going to be too much capital chasing easy low risk returns (if there isn't already..); no to mention a lack of geographic capital diversification.<br /><br />The only out I see is if govt. can drastically change their attitude towards infrastructure and industry investment, increase the role of private funding vehicles and push superfunds to consolidate and engage in the provision of this capital (in structuring and providing both equity and debt). An added benefit of pushing a bigger financing burden onto the private sector would be a lower reliance on taxation revenue (which could be passed back through more optimal tax structures to help combat lower real yields). <br /><br />Of course tax benefits dont have the greatest history of producing optimal capital allocation but in a low growth world I dont see much alternatives to competing for capital growth on a global scale. <br /><br />RW Anonymoushttps://www.blogger.com/profile/16695377017818077035noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-20090671198527310362016-06-23T09:56:22.400+10:002016-06-23T09:56:22.400+10:00I agree that the market clearing IR can be negativ...I agree that the market clearing IR can be negative. I also agree that without QE we may also have had negative IRs. Now, the distortions that I see are in determining the prevailing IR of assets that should not receive the risk free rate. These are the distortions of QE, evidenced by operation twist, and now the ECB purchasing corporate bonds among other programs. I also question if we would have interest rates negative for a long period of time vs only during a shorter duration 'event' if we allowed the free market to clear excesses. An historical comparison may be the forgotten depression as written about by Jim Grant.<br /><br />Without central bank intervention we would likely see certain sovereign bonds and other not risk free bonds see credit spread increases vs tracking with the risk free rate. Through this mechanism we would likely not need to live through the long duration of market dissapointment. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-24484277060643251552016-06-22T12:25:33.477+10:002016-06-22T12:25:33.477+10:00John - agreed; the most likely outcome is people s...John - agreed; the most likely outcome is people stop retiring at 65 and start retiring at 75-80. So you have more people producing goods and services for longer. That might seem to be an 'out', but it really also counts as a disappointment - if you retire older, you presumably are doing so because you have less savings & entitlements than you previously expected.<br /><br />On the market clearing rate of interest - couldn't agree more. There is no fixed 'cost of capital'. Rather the cost of capital depends, like everything else, on its demand and supply. Consequently, if there is more 'demand' to save (i.e. supply of savings) vs. the demand for use of those savings (consumptive borrowing and real investment), then the market clearing price indeed will be negative. Most of conventional economic theory is based on the assumption that things are scarce, including capital. That is rapidly ceasing to be the case in many instances. <br /><br />It is also perfectly possible for there to be a scarcity of 'risk' capital but an excess of 'don't want to take any risk' capital. Then you get reasonably priced/cheap equity markets but negative bond and money market real rates. It's also possible you have an excess supply of risk capital as well, in which case equity market will appear 'overvalued' most of the time (this is a problem with GMO's S&P valuation analysis - they assume a fixed cost of risk capital over time, but there is no guarantee that will prove to be the case; if it does it's pure chance). Under this scenario, the market is not overvalued; instead, the cost of risk capital has fallen.<br /><br />LTLyall Taylorhttps://www.blogger.com/profile/18230748365980023462noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-43273107871174683952016-06-22T08:23:12.813+10:002016-06-22T08:23:12.813+10:00Agree with you completely that interest rates are ...Agree with you completely that interest rates are largely driven based on time preference for consumption. The demographic issues are partly driving low interest rates but there are other factors.<br /><br />1 - Corporations are hoarding large amounts of cash that is stranded due to corporate structures optimized to avoid taxes. <br />2 - A relatively small number of ultra-wealthy individuals who are holding cash and bonds well in excess of any reasonable assumptions about their remaining lifetime consumption<br />3 - Asian and Germanic mercantilism<br />4 - Large amounts of margin debt used in global asset arbitrage<br />5 - Large amounts of 'fictitious capital' that represents unrecognized losses<br /><br />The Federal Reserve's decision to resolve the financial crisis by suspending accounting rules rather than recognize losses was a direct driver of #5. The Federal Reserves asymmetric policies which have suppressed volatility across a large range of assets classes has definitely encouraged #4 and contributed to wealth concentration #2.<br /><br />The same can be said of central banks in Europe and Asia as well. I wish I could tease out the demographics from other contributors but my guess is that demographics isn't the major driver.<br /><br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-44544530431569204912016-06-21T23:17:46.890+10:002016-06-21T23:17:46.890+10:00Hi John,
You mention that individuals “can inter-t...Hi John,<br />You mention that individuals “can inter-temporarily move consumption around …. But collectively we can’t”. This is better thought of people accumulating wealth with their surplus income (save) during their productive years, so that they can convert that wealth into income (dis-save) when they are aged.<br />It is because income is perishable that you are right to say much of what you consume “was made this year”. Income is the hairdresser cutting the hair of a client. Income is the milk produced by the diary.<br />With regard to your comment regarding ageing populations, in countries such as Japan what should be most evident is that the capital base (long-term wealth) is at peak levels. Sadly this is not obvious. Instead, much of the Japanese older population holds fiat monetary claims – essentially only forced claims through taxation over the income of the fewer younger people.<br />We can collectively defer consumption by redirecting our efforts towards capital goods and away from near term income production – the ‘productivity’ argument you cite – but there is limited evidence that this is taking place, particularly in a manner that will produce more income in future periods. Instead, much current activity seems to be poorly directed.<br />You argue that “we have huge populations wanting to defer consumption”. However, given the deterioration in human coordination over time and space it is a reasonable conclusion that society’s capital wealth (i.e. our commonweal) is today in a poor state. It is likely that the difficulty in undertaking a reliable exchange of income to wealth over time and space has led to a significant misallocation of capital. Symptoms of this poor quality exchange include a lack of long-term manufacturing capital formation, excessive housing stock and capital depletion through too high a level of short-term consumption. Instead of huge populations deferring consumption, we have huge populations who hold insufficient wealth and plan to live off the pension provided by the State.<br />With regard to your suggestion of “pension default”, there is no doubt that this will occur. Improved longevity has greatly increased the savings demands of the populous. A working life is typically at most 35-40 years (say age 23 to age 63) to be followed by 25-35 years (say age 63 to ages 87-97) in retirement. It is implausible that most people that have saved sufficient quality wealth to provide income for themselves throughout a long retirement. This is where some form of tontine will become essential, in addition to working to a later age.<br />Your “second out” of immigration is just an ‘extend and pretend’ and it doesn’t solve the real problem which relates to the lack of accumulated wealth. If income is taken from young ‘immigrants’ to pay the Age Pension of older (but sometimes still capable) ‘locals’ this is morally bankrupt and hardly likely to provide an environment which will encourage new people into the commonality.<br />It is not natural for the interest rate on gold bonds to be zero or negative. Stable low interest rates are natural under free exchange and this stable low interest rate encourages capital formation.<br />In our current monetary system, productive activity is penalised and speculative activity is rewarded. As local nominal government bonds (‘fiat bonds’) are unnatural, the interest rate is unstable and driven by speculation (aka central bank front-running). <br />You mention housing as one of the few services that you consume that was produced a long time ago. Shelter, food, water and clothing are the primary needs of human. There is no surprise that residential housing is the choice form of saving for most people. They don’t understand why, but they have the history of fiat ‘money’ on their side! <br />You suggest “equities are destined to disappoint”. Clearly this will depend upon the quality of the form of wealth over time and space. Those companies producing productive income should remain in high demand. Similar to housing it is the fiat denominator that is most at risk.Martin Hhttps://www.blogger.com/profile/10953492203839633298noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-49582249742979464432016-06-21T14:36:59.010+10:002016-06-21T14:36:59.010+10:00Hi Dmitry Kozlov: You say:
'If I have an asse...Hi Dmitry Kozlov: You say: <br />'If I have an assembly line today which pumps out X, say, cars, and bring me Y in profits, I can consume hookers today (perfect example of produced-on-spot service), or I can buy a second assembly line.' <br /><br />Isn't the purchase of the second assembly line in itself 'consumption'. It may not be hedonistic/purile or gratifying consumption, but it is consumption nevertheless; after all the workers employed to produce said assembly line or raw material owners from whom you purchased the components for the assembly line may well decide to consume conspicuously, on cocaine and hookers!! Pereg25https://www.blogger.com/profile/12536078403209083663noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-91585240880951353502016-06-21T13:54:45.792+10:002016-06-21T13:54:45.792+10:00Hi John,
You mention that individuals “can inter-t...Hi John,<br />You mention that individuals “can inter-temporarily move consumption around …. But collectively we can’t”. This is better thought of people accumulating wealth with their surplus income (save) during their productive years, so that they can convert that wealth into income (dis-save) when they are aged.<br />It is because income is perishable that you are right to say much of what you consume “was made this year”. Income is the hairdresser cutting the hair of a client. Income is the milk produced by the diary.<br />With regard to your comment regarding ageing populations, in countries such as Japan what should be most evident is that the capital base (long-term wealth) is at peak levels. Sadly this is not obvious. Instead, much of the Japanese older population holds fiat monetary claims – essentially only forced claims through taxation over the income of the fewer younger people.<br />We can collectively defer consumption by redirecting our efforts towards capital goods and away from near term income production – the ‘productivity’ argument you cite – but there is limited evidence that this is taking place, particularly in a manner that will produce more income in future periods. Instead, much current activity seems to be poorly directed.<br />You argue that “we have huge populations wanting to defer consumption”. However, given the deterioration in human coordination over time and space it is a reasonable conclusion that society’s capital wealth (i.e. our commonweal) is today in a poor state. It is likely that the difficulty in undertaking a reliable exchange of income to wealth over time and space has led to a significant misallocation of capital. Symptoms of this poor quality exchange include a lack of long-term manufacturing capital formation, excessive housing stock and capital depletion through too high a level of short-term consumption.Instead of huge populations deferring consumption, we have huge populations who hold insufficient wealth and plan to live off the pension provided by the State.<br />With regard to your suggestion of “pension default”, there is no doubt that this will occur. Improved longevity has greatly increased the savings demands of the populous. A working life is typically at most 35-40 years (say age 23 to age 63) to be followed by 25-35 years (say age 63 to ages 87-97) in retirement. It is implausible that most people that have saved sufficient quality wealth to provide income for themselves throughout a long retirement. This is where some form of tontine will become essential, in addition to working to a later age.<br />This is where your “second out” of immigration is just an ‘extend and pretend’ and it doesn’t solve the real problem which relates to the lack of accumulated wealth. If income is taken from young ‘immigrants’ to pay the Age Pension of older (but sometimes still capable) ‘locals’ this is morally bankrupt and hardly likely to provide an environment which will encourage new people into the commonality.<br />It is not natural for the interest rate on gold bonds to be zero or negative. Stable low interest rates are natural under free exchange and this stable low interest rate encourages capital formation.<br />In our current monetary system, productive activity is penalised and speculative activity is rewarded. As local nominal government bonds (‘fiat bonds’) are unnatural, the interest rate is unstable and driven by speculation (aka central bank front-running). <br />You mention housing as one of the few services that you consume that was produced a long time ago. Shelter, food, water and clothing are the primary needs of human. There is no surprise that residential housing is the choice form of saving for most people. They don’t understand why, but they have the history of fiat ‘money’ on their side! <br />You suggest “equities are destined to disappoint”. Clearly this will depend upon the quality of the form of wealth over time and space. Those companies producing productive income should remain in high demand. Similar to housing it is the fiat denominator that is most at risk.Martin Hhttps://www.blogger.com/profile/10953492203839633298noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-91467641942633993272016-06-21T13:07:04.685+10:002016-06-21T13:07:04.685+10:00Many comments simply citing investment in capital ...Many comments simply citing investment in capital assets without a mechanism, when lack of a mechanism is the whole point! (impossibility of collectively deferring consumption) I'm not much more impressed with self driving cars as a mechanism - transportation is under 14% of 75year old+ expenditures and self driving cars will only make a somewhat small dent in that.<br /><br />Expenditure source: http://www.bls.gov/cex/2014/combined/age.xlsx<br /><br />Taking a look at some of the others though, I think we have a lot of room to defer consumption.<br /><br />•Housing at 36.5%. You've mentioned this as pretty easily deferrable.<br />•Healthcare at 15.6%. You mention this as a potential negative area. There are a lot of issues in this sector but I think investments in robotic surgical equipment and AI have the potential to defer a significant amount of consumption. (think ISRG, or just for fun, sword wielding robots https://www.youtube.com/watch?v=O3XyDLbaUmU)<br />•Food at 11.9%. I think there's room here, again primarily through robotics investments (more self driving combines, improved cattle herding drones) but also from capex used for food energy inputs.<br /><br />I agree we are looking at a future with negative or low real returns but think there enough opportunities to defer income with even Japan's fertility levels. Those solar panels look a lot better with a 0% or -1% discount rate.<br /><br />I also second Michael's comment on the endogeneity of demographics. Japan's birthrate has ticked up. It's ever so slight, but the cost of living is still high and the population is still close to all time highs. First worlders are demanding a higher standard of living for themselves and their kids before they will have more kids.Silicon Valley Farmernoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-53821596327329359582016-06-21T06:31:13.234+10:002016-06-21T06:31:13.234+10:00First, what this post by John Hempton is making is...First, what this post by John Hempton is making is essentially a quantitative claim without any quantitative analysis. Sure, you can say that there are factors that point to low natural rate of interest. But once you start talking about negative rates, or whether the Fed should raise the rates or reduce them, then you are implicitly actually putting some parameter values and data into some sort of formula. This post didn't have any computations about it. I doubt I'd see similar "no numbers" analysis about stocks in this blog.<br /><br />Second, there is a way to collectively defer consumption. It's called real investment. High real investment results in lower consumption today and higher consumption in the future. Of course, the set of investment opportunities is not unlimited, so higher real investment will result in somewhat lower expected return on that investment. The world is not an endowment economy in which consumption is given. John, of course, understands this, but wanted to point it out for completeness as I think it was underemphasized in the post.<br /><br />Third, central bank policy does influence real interest rates. That's obvious from two observations. One, if you rate the dovishness and hawkishness of the central bankers, I believe you'll see a correlation between real interest rates across currencies controlling for local demographics etc. Two, the market response to news about monetary policy is strong. If monetary policy wouldn't impact real interest rates, it would be difficult to explain the monetary-policy announcement reactions of stocks and inflation linked bonds.<br /><br />The Fed in the US has a whole staff trying to estimate these things. Those people are not idiots. I think the current Fed estimates for the US are 1.25% natural real rate of interest (lowered based on recent empirical work), 3.25% long-run equilibrium Fed funds rate, 2% inflation target, and about 5.0% natural rate of unemployment. Currently, the core inflation is running at 2% target and unemployment rate below the natural rate. Simple models would predict an appropriate Fed funds rate of 3.25% in this situation. Complex "optimal control" "asymmetric loss" "forward guidance" "liquidity trap" models would predict appropriate Fed funds rate of little over a percent. I am not aware of any quantitative model calibration that would not suggest a higher than current Fed funds rate.<br />obelixhttps://www.blogger.com/profile/13404559782994766876noreply@blogger.com