Managing Money in a Zero Interest Rate Environment

https://www.bridgewater.com/ray-dalio-managing-money-in-a-zero-interest-rate-environment

by _zhqs • 6 years ago

4 5 6 years ago

PaulHoule3• 6 years ago

Usually I am a Ray Dalio fan, but I felt this video was not worth the time.

From a marketing point of view it reiterates the obvious point that a financial plan built around cash, stocks, and bonds in 2020 that assumes positive returns isn't a plan.

I love Ray's articles that describe how "All Weather" works, how you can put together multiple beta sources with some leverage and derivatives and get "better" results. (e.g. qualified "better" because you have to decide if you'd rather eat returns or eat Sharpe ratio or give up because the Sharpe ratio has nothing quantitative to say about the black swan that's coming)

What he doesn't do is even suggest that sources of beta exist that aren't impacted by the ZIRP catastrophe, or even that there is something much more sinister about it:

So far as we know, there is no end to the ZIR environment. What would happen if interest rates go up? Overleveraged consumers have their $500 mortgage payment become an $800 mortgage payment. Countries that were spending $10 billion a year on interest payments are not spending $100 billion a year of interest payments.

If interest rates go up, everybody will default.

You could color it morally in different ways, but factually, participants in our economic system have been making unrealistic promises to each other for years. ZIRP has let us deny that truth, but someday it won't be possible to deny.

josho• 6 years ago

What events would drive a future with high interest rates?

I’m not imaginative enough to come up that scenario. Nor would it seem all mainstream analysts. But I am curious as to what might drive that change.

PaulHoule3• 6 years ago

"Reversion to the mean" is one argument.

A conventional answer would be that eventually inflation breaks loose. People are afraid of Weimar-style hyperinflation, but more likely it takes decades for people to make up their mind that inflation is worse than disinflation, just as it took 35 years from WWII to Monetarism. There never has to be a discontinuity, some point where you are denied what you are owed, but boy a pound is not worth a pound.

We've seen cases in the past 20 years where central banks have tried to increase interest rates modestly and were shocked by the contractionary effect and had to reverse it.

Another is "what cannot go on forever will not".

Could the private sector contribute meaningfully to the "saving for retirement" goal of many people under ZIRP? How would that impact CALPERS, e-TRADE, etc.? What sort of discontinuity happens to the financial sector when it fails at job 1?

Interest rates are connected with the discount rate and the idea that a dollar today is worth more than a dollar tomorrow. The growth of the economy (e.g. "our systems work") is reflected by a positive discount rate, so a dollar invested today naturally brings more tomorrow.

Negative interest rates signal that the system does not work, that a dollar is worth more today than it will be tomorrow, that investing dollars today destroys value.

That's a pessimistic take on civilization and at best you get this

https://www.amazon.com/Prosperous-Way-Down-Principles-Polici...

which talks about negative interest rates as a tool in planning declining societies.

If the world is going to be getting poorer instead of richer then maybe negative interest rates reflect that, but you are not going to see honest engagement of politicians, business people, media, etc. because audiences would wither before the despair.

Finally there is the "middle road" where we have the right discontinuity very soon.

For instance, a 30-year old investing for retirement today needs to maximize the productivity of the economy in the long term, not profits. Low interest rates should be sending the signal to phone companies, for instance, to upgrade to optic fiber. If they did so, they would accelerate the long term growth of the economy. In the short-term there is no competition and the phone company sees no reason to retire 70 year old copper lines. But the pool of production that would have been enabled by a small investment up front never materialized and because opportunities like that were rejected in a lifetime that retiree is poor.

It seems some reorganization could get capital flowing again -- what that organization is is less clear.

Managing Money in a Zero Interest Rate Environment

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