6 Responses to “January 6, 2021”

1. stusclues says:

   January 7, 2021 at 10:04 am

   “Demographic developments are pushing the real interest rate trend higher. Baby boomers have been retiring and have stopped saving; in fact, they are in their “decumulation” years, which reduces the supply of funds.”

   This line of thought is flawed. Joe Lunchbox’s decumulation years are insignificant when measured against the excess holdings of the top decile of wealth holders. So much cash is piling up in the accounts of the wealthy that it will accept literally whatever the risk-free rate (plus some meagre amount, maybe) happens to be for a long time yet.

2. peet says:

   January 7, 2021 at 8:32 pm

   Stusclues, isn’t interest rate anticipation a somewhat dismal science, especially when you move from short-term to longer-term forecasts?

   In the last 5 or so years we’ve had talk of inflation, deflation, rates going higher, rates going lower or even negative … I distinctly remember 2013 when I still used a broker and was warned against buying perpetuals because rates will go up. Over the years James has written about this as well, there’s a series of posts starting July 27, 2015 from a reader wondering if he or she should be buying perpetuals because of inflation expectations. Speaking for myself, I eventually took the approach in 2015 of simply allocating, with only modest variations, 50% to prefs and 50% to resets because I had little confidence in my ability to see through all the predictive noise.

   In the end everything depends on which assumptions you make. As one example, Prof. A writes that “we may be reaching a peak in productivity growth as experienced baby boomers retire and are replaced by less experienced workers who will nevertheless be in high demand because of low population growth. These workers will demand higher wages. This means higher inflation down the road. “ I’m not so sure. His inflation conclusion may well be wrong if immigration replaces a good portion of the decline in the baby boomer work force, or if our economy grows only modestly or becomes less capital or labour intensive, or if union membership continues to decline, and so on.

   That being said, I do watch the BOC’s inflation expectations and their management and comments of same. Rightly or wrongly I believe the embedding of relatively low inflation expectations by a central banks, at least for the next two years or so, tends to have a self-fulfilling tendency.

3. stusclues says:

   January 7, 2021 at 9:18 pm

   Dismal indeed. I agree Peet. There are lots of possible paths that depend on lots of assumptions. I just don’t like the decumulation argument in particular 🙂

4. peet says:

   January 7, 2021 at 10:08 pm

   Stusclues, to be clear, in no way did I intend to include your comments on the decumulation argument in the category of “dismal science “ 🙂

5. mbarbon says:

   January 8, 2021 at 8:15 pm

   There may be “accounts that pile up cash”, but there may be also a movement away from “cash instruments (ie GIC/BONDS)” to equity investments given the rates are so low….

   Two Examples:

   One particular investment I see (but do not purchase) is the “Equity linked” GICs now actively advertised at Banks. They advertise this, so it must be working.

   Also, there is literally NO advertising of fixed GIC/Term deposits of any kind at banks, so its either they have nothing to offer, or that “no one is even considering GIC/Term”. Alternatively, a lot of cash may be funneled to online banks.

6. paradon says:

   January 9, 2021 at 1:06 pm

   I see interest rates remaining low out of necessity as much as anything else. I don’t see how the Feds could absorb anything much north of 2% with any hope of ever recovering financially from covid spending given our low rate of population and productivity growth. I think what we will see are various levels of Government (as we have in BC) legislating price controls on items closely tied to inflation (ie rent/housing, food costs, fuel, etc) to give the appearance of containment.