Investing in an environment with a zero interest rate

Investing in an environment with a zero interest rate

The Covid-19 pandemic has set up a new monetary and fiscal model. That has consequences for investing in a world with a zero interest rate.

There are three broad categories of monetary policy for a quick refresher which has been discussed in more detail in other posts.

i) Short-term interest rate adjustment when they get to zero or a little less to very negative, they’re not motivating anymore. So there’s no motivation to lend and bring money and credit into the system.

ii) Long-term interest rate adjustment; Long-term interest rates are embedded in securities like bonds that are of longer duration. Central banks will ‘print’ money (i.e., electronic money creation) and buy bonds to lower long-term interest rates. It is sometimes referred to as quantitative easing (QE), or even, literally, purchasing money.

They will start with government bonds, and go down the quality ladder to corporate bonds. Even stocks or equity-like securities if necessary.

Compared to cash prices, the spreads on these can be taken down so it is no longer stimulative. When that’s out of the room – as in all of the world’s three major reserve currency sections (the US, developed Europe, Japan) – they have to move on to the third type of strategy.

(iii) Joint monetary and fiscal policy; When the first and second forms of monetary policy are out of gas and there is a problem to rectify income, expenditure, and debt imbalances, central governments will move towards coordinating the two main policy levers. Money and credit do not get to where it needs to go, therefore it stimulates a need for this.

This can take a variety of forms from directly monetizing deficits. (e.g., central bank directly donating money to the government) or participating in direct spending and consumption programs ( e.g., helicopter money).

Credit and money, and what drives the markets. Monetary and fiscal policies are the two key mechanisms on how capital and credit are forced into the financial system and transfer markets so it is necessary to understand them.

We’re now on to the third phase of monetary policy in the US, and virtually all of the developing world. For certain situations, the short-term interest rate is at zero or even negative. And the long-term interest rate was pushed down to near zero or even negative.

In order to make the program work, fiscal and monetary policies must be organized to order. So that they bring the money and credit into the hands of those who need it to “save the economy.”

While the fiscal policy has the disadvantage of being a political process, it directs resources. While monetary policy comes in to provide liquidity and prevent interest rates from rising to avoid offsetting the types of things to be accomplished.

A separate article addresses the nature of such policy choices.

Fresh Currency Model

The Covid-19 pandemic hastened the move toward a common fiscal and monetary policy.

It would eventually have happened with a large amount of debt coming due, as well as debt-like liabilities in the form of pensions, healthcare, insurance, and other unfunded obligations.

The large drop in virus income has yielded huge budget deficits. This is going to be around 20 per cent of GDP in the US in 2020. It was about 4 per cent of GDP in late-2018. This must be funded by central banks printing the currency.

This third type of monetary policy is simply to get money in the pockets of spenders. To make up for lost revenue in order to prevent an elongated economic slump.

The byproduct of this policy is that over the developed world there is zero to near-zero (or negative) interest rate.

With most investors in developing countries concentrating on their own domestic markets, this means that cash and other types of quality bonds are generally not very viable investments from a revenue perspective. Fewer people want to keep an investment if it does not yield anything in real terms. And if it does not yield anything in nominal terms it will keep it even less.

Even the BBB yield is just around 2.5 per cent, which is one step above the junk grade.

Investing in an environment with a zero interest rate
(Source: Ice Indexes, LLC)

You are left with about nothing after inflation and taxes.

The zero and near-zero rates in the developed world are perhaps the most important thing for investors to consider. That is because they need to know how to handle capital in this modern environment efficiently.

The old methods of easing politics and providing a boost to asset prices do not work to the degree of which we have become accustomed.

We were used to being near the zero lower bound on interest rate in all major reserve currency countries since 2008, due to the financial crisis. It was true in the United States, the core EU countries and the United Kingdom, Japan, Switzerland, Canada, Australia, and New Zealand.

Yet the strategies that central banks pursued to ease were actually reducing cash rates and going into purchasing financial assets when that wasn’t enough.

The pandemic has brought about the same constraints but worse.

We were already very close to heading in with the zero tied. The debt overhang from the financial crisis has not gone away and can take a long time to work off. At the household level it improved a bit but got worse at the corporate and sovereign level. This avoided a substantial rise in interest rates (i.e. , increased cost of debt servicing).

In a typical recession, to rectify the debt and income imbalance, you must drop short-term interest rates by around 500bps.

This drop in output due to the pandemic, at more than twice the severity of the 2008 financial crisis, was far from typical on a global level. It was the deepest since the period 1945-46 and this was related to World War II ravages.

World War II: Deepest global economic contraction

Investing in an environment with a zero interest rate
(Source: Banque mondiale)

Monetary policy had much less fuel with all the rates being small with a decade of purchasing financial assets and driving down financial asset price premiums.

You can see from history that most economic downturns are debt- and liquidity-related. And these are dealt with by an tightening of monetary policy in one way or another.

If you go back to the 1800s and look at how debt and market problems were rectified by governments, they would always ease. Depressions tend not to last forever. As they find out in one way or another that they need more liquidity and credit in the system. Regardless of what kind of monetary system they are on (i.e. commodity-based, commodity-linked, or fiat). If they are on an unconstrained monetary system ( e.g., gold-based, bimetallic) and it doesn’t work to change the commodity’s convertibility for the currency, they inevitably sever the tie with it.

It could end up depreciated as to the value of the currency. And it’s particularly a risk when that currency isn’t in great global demand. Or when a lot of money has been borrowed in a foreign currency, as they usually do in the emerging markets.

But they’ll still want to ease their operation to get a reflation.

Hitting the zero interest rate bound has never been a tough constraint even though it seemed like a barrier and a novel problem when it happened. As in the 1930-1932 period in the US during the Great Depression and the 2008-09 post-financial crisis period when buying assets at lower long-term rates became the new policy.

Even if the nominal interest rate can only rise to around zero, real (i.e., inflation-adjusted) interest rates can go pretty down.

President Roosevelt announced on 5 March 1933 that he would end the link with gold and depreciate the currency in order to reflate the economy. That provided the money banks needed to repay their depositors.

The same sort of thing happened on August 15, 1971, when President Nixon said he was unlinking gold from the dollar (the relationship had previously been reestablished under the monetary system of Bretton Woods in 1944). There were too many liabilities in relation to the amount of gold available and not enough gold was available to go around.

During 2008, there was the same kind of “desperate relief” situation with the US Congress and Treasury coming together to build the TARP plan and move through quantitative easing.

Mario Draghi has had a similar form of decision to make in 2012, with the debt crisis in Europe.

Owing to the Covid-19 pandemic in March and April 2020, we had moves from the US Federal Reserve, US Congress, and Treasury Department to bring more money into the economy with more QE and a synchronized fiscal and monetary policy.

Such are the kinds of things that you see happening over and over again when you have a zero interest rate. And what decision-makers are doing to make debt and liquidity pressure easier to save their economies.

The Federal Reserve has created a lot of money right now, especially in the US, and has implemented credit support programs with the US Congress.

That goes into equity assets and credit assets of various kinds. You see that some of it falls into gold too. Eventually you could also see a depreciation in the dollar’s value. However, at the beginning a dollar squeeze and appreciation occurs because people have a lack of money relative to their need for it.

It’s all timing. You see first the bond yields drop (bond prices up), then later the currency drops.

But at the time, you don’t really know which of these various interactions between asset classes will occur or how it will play out.

Back in 1971, the value of real stock prices (up in nominal terms, down in real terms) decreased considerably. Speeding up inflation. Bonds did badly, too. Goods and gold performed best.

Due to the inflationary 1970s, the Fed eventually had enough under Volcker, who raised interest rates (i.e., cash rates) to more than 19 per cent. That was more than the inflation rate ( i.e., the real rates were positive), which attracted more dollar and commodity and gold inflows. It caused a recession but only temporarily as ultimately eased by the Fed. This easing has given way to the 1980s and 90s stock and bond bull markets. Commodities again fell out of favour, preferring stocks and yielding price on fixed income.

Investing in an environment with a zero interest rate
(Source: Federal Reserve Board of Governors (US))

Many investors fail to predict these transitions.

That’s why having balance is key, which we will be getting into later.

The position of Cash in a Portfolio

Investors are being used to seeing cash as a safe investment.

Yet investors can’t just sit in an overabundance of cash in this world where central economies need to generate liquidity and fund very large deficits to stay out of a deflationary depression. To provide liquidity and optionality, and to be safe from having to sell in a drawdown, there must be enough, but too much becomes counterproductive.

When talking about the idea of wealth shop, cash isn’t as healthy as that. There is nothing it gains, it is inflation that consumes the returns over time. Then when printing a lot, there is also the aspect of devaluation over the long term.

Although many investors tend to think about just returns on equity, a portfolio has to have a level of balance.

Looking at history and finding analogous periods to the one we are in now (e.g. the period 1935-1940 or another), you can’t be sure if you will see a depreciation in the value of money and the common store of wealth (i.e., your own domestic currency).

So what you call risk is murky because risk encapsulates a lot of different things. Many have become accustomed to seeing cash as a risk-free investment, as its value does not move much around. But risk is not mere volatility in prices.

Cash can be a volatile asset because it has a stealthy way of losing value over time.

So, in terms of having a strategic asset allocation mix you have to think about different asset classes and different geographies.

The one thing you can be fairly sure of is that the Federal Reserve and other central banks won’t allow an implosion to occur without much money being printed and doing what they can to save the economy.

Danger acquisitions

The expectations for forward returns on risk assets are, in real terms, likely close to zero over the next decade. Central bankers aren’t going to want nominally bad asset prices, but the real likelihood of them being very good is low. And yet investors will always face the uncertainty of owning those properties.

One of the market ‘s fundamental equilibriums is that stocks must yield more than bonds, and bonds must yield more than cash, and the appropriate risk premiums.

Cash yields about nothing at the moment, or negative depending on where you go, and central banks want to keep it that way to boost credit creation and limit the cost of borrowing. To own it there is essentially a penalty.

A 10-year government bond, a common benchmark in any market, yields between 50-100bps as written in the United States, about zero in Europe (each market is different), and zero in Japan where yield curve control is practiced. They are the three major currency reserve regions.

In China, the other major global financial system, the 10-year bond is somewhat below 3 per cent. With standard interest rate policy still effective, China has more room to work within the traditional monetary-policy framework.

Stocks are priced off the discounted cash flows present value.

The yield on stocks is usually about 3 per cent higher than the 10-year bond. And this 10-year bond normally offers you more than cash around 2-3 percent. But, basically, cash and bonds are now in the same bucket as funding vehicles rather than investment vehicles.

When we look at US stock returns, the US 10-year, USD currency, and gold (another store of value that yields a little more than currency in the long run), we will see the following yearly returns.

Assets in the Portfolio

Portfolio component performance statistics (January 1972-June 2020)

Portfolio component performance statistics (January 1972-June 2020)

Through time, we should look at the monthly correlations too.

Correlations to the month

Portfolio asset correlations

Portfolio asset correlations

We don’t expect equity returns to exceed that premium of 2-3 per cent over bonds. It is also unlikely that the nominal returns you see from the past will transpire. This has been helped not only by interest rates and other easy liquidity policies, but also by past higher productivity rates and tailwinds of job growth ( e.g., women entering the labor force, growing working-age population) that are no longer present.

In the next ten years or so, stocks are likely to see annual nominal returns of maybe 3-4 per cent while still enjoying the same level of volatility.

In addition , higher returns are unlikely to manifest in private equity or venture capital. They provide a little bit of a premium over riskier and less liquid stocks.

If you keep all these assets in your portfolio and you wake up ten years from now, you are likely to be frustrated at their value compared to how a portfolio of stocks and bonds has risen over the past ten years. Central banks have cut interest rates and have done a variety of other measures to help them raise prices. That kind of paradigm is pretty much over.

Financial assets are simply cash flow securitising. If those cash flows aren’t really there – a function of macro-level productivity and labor growth, and revenue is above micro-level expenses – then asset values aren’t there either.

Because of all the debt and debt-like liabilities (e.g., pensions, healthcare , insurance, other unfunded obligations) that come to us in the U.S., we will need more returns, but they will not be there at the required level. They are at around 15x GDP at the moment and they will never be compensated by efficiency outcomes.

At present, asset prices are well beyond the economy through the liquidity pushed in by the central bank to be stimulative in an environment of zero interest rate.

That’s pushed all asset classes up prices relative to their expected returns. Hence expected returns will be lower, especially in relation to what kind of returns are required. That’s also a fact investors have to face up to.

So there’ll still be small returns around that and a lot of uncertainty. With less potent monetary policy, there is a risk of a downturn and not being able to handle that in a normal way.

That brings more violent sell-offs. Then there’s the virus uncertainty as to whether that’s coming back, which has the big economic implications about potential big drops in spending and revenues.

The new monetary-policy model means that the distribution of resources no longer exists in the manner we are used to it.

Before the way monetary policy would work it was through depositing cash by the central banks. Then it was the bankers, and those who had the savings and capital, who would lend it to people and institutions based on the investment’s perceived reward and risk.

Now it’s largely policymakers who decide who’s getting the money, who isn’t, and how much. Rather than the previous form, it’s a form of “state capitalism” that was more hand-off and “bottom up” than “top down.”

Building the Portfolio

We spoke about keeping a well-diversified portfolio in previous posts, which can expand and capture risk premiums in most environments, and deliver lower drawdowns, be less vulnerable to left-tail risk, among other benefits.

Well diversifying will increase your return per unit of risk better than anything else you can do in practice.

This is more important than ever even if asset class returns are unlikely to be high , particularly in real terms.

Most portfolios are structured to be a specific class of assets long. Most investors are in a bias towards their own country’s stock markets. Typically they have all in stocks, or securities up to a volatility point that they can handle and scatter for the remainder in any other assets (currently bonds).

For most investors, the most important thing is to begin with asset class diversification, different countries and geographic regions, and different currencies.

In this particular setting the one thing we know is that we do not know anything.

Time what is going to happen isn’t necessarily easy. The markets make comparisons between the different asset choices fairly effective. Spotting a mispricing isn’t always obvious, and saying one thing is necessarily better than another.

The best thing is to diversify in a way that will produce the excess return in a way that is as stable as possible and the least risky. This will be made more stable by combining different assets that do well in different environments.

Concentration within the traditional stock portfolio and in the same currency, as most tend to do, is dangerous, historically borne out. Everyone’s favorite asset class will fall in their lifetime by some 50 to 90 per cent.

We saw central banks come in during the coronavirus pandemic to raise asset prices, replace lost wages and reflate the economy through “serious” liquidity steps.

They ‘re likely going to continue doing that where they can. Then it is a question of how this in asset groups expresses itself. You can’t be sure exactly how it will go.

– Is it actually driving stocks up in real or nominal terms?
– Does the value of money drive it down?
– Does this push up prices of gold which are priced as the reverse of money?
– What’s inflation doing?
– What is the role of the bonds indexed to inflation?

From 1945 onward, with the Bretton Woods monetary system institution, which created a type of world order in the US and the dollar. And through that, investors learned certain habits and a way of doing business. It has been perfect for financial assets in the US for the most part. But as the US has built up bonds and its role in the world is declining (it is gradually making up for less than all economic growth), those kinds of returns are no longer realistic.

Nominal vs. Real Yields

To certain types of investors the issue of nominal versus actual returns is relevant.

Those concerned about nominal return targets, such as pension funds, are usually those with defined benefit plans. They know exactly how much they will have to pay in the future, and therefore target nominal returns.

Those who are more concerned about real returns include endowments and foundations, because they are concerned about what they can buy with these returns.

Risk for many types of investors relates to a mismatch between assets and liabilities. Many creditors have a fixed responsibility for returns where the essence of their liabilities is known beforehand. Others have a real liability for return where the real component of buying power is more important.

The first factor in designing the portfolio when contemplating nominal versus real is what the base asset, also called the “risk-free” return, is.

It’s a nominal return bond, for a nominal return portfolio.

This is a true return bond, or an inflation-indexed bond (also known as an inflation-linked bond), with a real return portfolio. For those more concerned with their actual returns, then inflation-linked bonds become the base asset from which the portfolio is built, as those pay the rate of inflation.

Off that, the maturity of the underlying assets will have to match the nature of the obligations.

In terms of moving beyond that into other properties, though being consistent with the liability process, it has to be consistent with the specific return objectives. This ends up being a different kind of engineering exercise from investor to investor.

The overarching problem is that most creditors – e.g. mutual funds, endowments, foundations – do not have adequate income relative to their needs in relation to their liability source.

It extends to both companies and individuals. They have a certain amount of income, a certain cost structure, and some amount of savings on liabilities.

Going through individual businesses, you can see that some won’t be able to pay out a certain amount of money based on the revenue they generate. Which means they’ll need to dip into their pool of savings. So it is a matter of how long this will go on for.

Some firms can either raise capital to push their time horizon out, or even receive direct government support if the cost of not “bailing them out” is higher than failing. Some are going to stand by default.

You can’t tell most people when it comes to retirement obligations that they won’t be getting their money. Default on those is not politically appropriate, so they will have to be monetized by more rounds of monetary “printing” to fill the gaps in liability.

Other factors relevant to investing today

Beyond the restricted monetary-policy landscape and fiscal-policy determinations of where capital goes, there are many factors that are of great importance to today’s markets.

Importantly, we have various issues that drive more internal conflict, such as wealth gaps, opportunities gaps, values gaps and political gaps. That is because of a variety of reasons.

One is monetary policy itself which has benefited those who hold financial assets over those who have not, generating wider inequalities in income.

One is the impact of wherever it is cheapest to locate output. Many parts of rural America have been hollowed out as the jobs have gone offshore which employed many people in some areas. That has contributed to lower incomes and a number of problems, such as higher suicides, more opioid addictions, etc. Then there’s the issue of education, with some groups have better access to quality education than others. This often includes adult wages, rates of imprisonment, and so on.

That’s motivated by more conservative political trends, and more of a left-right divide. You have gaps in values and this moves into what kind of leaders are elected, where you have left-wing populism (e.g. Bernie Sanders) and right-wing populism (e.g. Donald Trump).

If you are facing an economic downturn, all this boiling tension that comes from these various problems appears to spill over in one way or another.

And who gets elected has implications for corporate tax rates, individual tax rates, tax rates on capital gains and other matters related to splitting tax expenditures.

Geopolitics: Estados Unidos y China

Also, there’s the geopolitical environment, particularly with China emerging to challenge the US as the dominant global force.

In fact, the current US-China dispute is a serious long-term geopolitical rivalry which will continue for decades to come.

There’s the stuff of “trade deal” that seems to provide a relief, but is actually superficial and a small part of a larger picture.

The center of the situation is not just about balancing out trade flows or lining those up. China should purchase more US goods it has already been allowed to buy on some scale (such as soybeans and natural gas).

But important structural issues that undermine China’s long-term strategic goals will not be met to much extent.

This includes things like forced transfer of technology to foreigners looking to do business in China, theft of intellectual property, market access, market competition , government subsidies, cyber-espionage, and who controls what global spheres of influence.

We know that either the US will consolidate as the main global superpower, or China will increase its influence in technology, economic and military matters. Whether the latter forms a more bi-polar or multi-polar environment, this would create a bifurcation in the global economy that drifts away from a US-centric one.

There are different conflicts nested in one, and they all follow a certain template, going back throughout history. There is a combination of disputes regarding:

– Trade
– Technology, and who produces what (together? separately with supply chains?)
– Capitalisation
– Martial and other geopolitical issues

With capital, one country may not want to own the other country’s currency through bonds if the nation they ‘re at odds with decides not to make due unilaterally on that amount. Historically that was true and it is true today.

Both economies could be supply chained separately. Competition and discrepancies may emerge about who is developing what latest, revolutionary technologies ( e.g., 5 G, quantum computing, AI chips). Other spheres could involve broader technological decoupling.

Over the course of history this form of system has occurred time and again.

It’s a broader struggle of power between a dominant power and ascendant power that has been going on and on throughout history. The standard way in which these conflicts develop back centuries is to follow the standard template-first it becomes trade, then economic and capital-related, then in most other ways geopolitical.

There has been a shooting war in 12 of the 16 times over the last 500 years when ascendant forces came up to try and supplant the dominant power.

Investing in an environment with a zero interest rate
(Source: Science and International Affairs Centre, Harvard Belfer)

Around the beginning of the decade in the 1930s there was a downturn which set off various forms of internal and external conflict. “Economic wars” were fought and new alliances were established. Then, the end of the decade came a real war.

It is not that the base case today is actually a real battle. It depends on how one manages the political relationships.

China knows that this conflict is about the US seeking to ensure its continued global geopolitical and economic dominance by poking at China’s weak spots (i.e., its continued dependence on global trade, although it is shifting from a manufacturing-focused, export-centered model to an internal consumer model).

China has little reason to commit to something that threatens its strategic long-term goals in a systemic way. They aren’t going to follow through if they do.

Across the supply chains, this has huge economic consequences that can alter in very permanent ways and impact many companies. This can alter the movements of money, and also affect exchange rates.

It is going to be there for a long time, no matter who’s in charge in the US.

Multi-asset, multi-country and multi-devise investment

It ‘s important to be in various asset classes, multiple nations, multiple currencies and stable wealth store holdings in order to diversify well.

No, wealth is not lost as much as changes are.

This moves between asset classes, nations, currencies and store-holds of capital. When you’re too invested in something you won’t be able to gain when that money transfers out to that asset class (and/or the underlying nation or currency) in an atmosphere inhospitable to it.

For example, if growth underperforms expectations it is bad for equities. If you don’t have a portfolio that’s well diversified into other asset classes, and so on, you ‘re not going to have the assets to “catch” that move. You can get some higher highs with concentration, but much lower lows, higher risk of left-tail, longer underwater times, and higher risk per return unit.

You’re poorly diversified if you’re only in stocks in your home country and home currency, as you’re only betting on a certain macroeconomic theme. It will sometimes work, sometimes it won’t work and will lead to very bad drawdowns. You are dealing with lower than normal returns as mentioned in previous sections but with the same or higher risks going forward.

If you balance well, you don’t have to predict shifts ahead of time, or tactically move around. All will still be in competition – that is, one asset class to another, one country to another, one currency to another, financial to alternative wealth stores.

Capital and wealth are moving about. The starting point, though, is how to get to and from a risk-neutral distribution of strategic assets.

When it comes to making tactical decisions on what’s going to be good and bad, most investors will be very careful on how they can do it well, so a safe idea to start with is the risk-neutral “foundation portfolio.”

The most striking things to invest in

The things that seem to confuse you the most in markets are things that haven’t happened recently, or even in your own lifetime, but have happened traditionally over and over again with the same clear cause and effect relationships.

Investors tend to extrapolate what they’ve become used to, but it’s always something else that will get you.

For starters, the three major market crashes in the past 20 or so years have all been somewhat different in nature from one another.

This was the crash of the tech sector bubble in the year 2000.

Then, it was a crisis of subprime debt (mostly through housing in the household and financial sector). This was similar to the type of bubble with consumer debt that we had during the Great Depression. After that, the household sector and the financial sector deleveraged, but leverage increased in the non-financial corporate sector and at the sovereign level, only to see it all derailed, of all things, by a virus.

Knowledge of the mechanics of debt cycles is critical. These are primarily what drives market movements. It is necessary to know what central banks are doing, because they are the ones with the biggest liquidity levers, which is what drives markets.

Alongside the debt cycles, some significant shifts tend to occur, especially the “breaking points” that cause great economic damage.

Big currency depreciations, for example, appear to occur at the end of the debt cycles because devaluation of the currency is one of the easiest ways to get out of it. It makes servicing debts cheaper.

At the same time, it is important to understand the nature of how things are now-and not just blindly following past templates-because each case is different.

For example, it produced big movements in those currencies relative to metal in 1933 and 1971, when there was the unlinking of currencies from gold. Today, because currency regimes are largely free-floating, we ‘re much less likely to see those huge, abrupt depreciations.

Policy cycles also revolve around debt crises. Central banks are pursuing much of the same measures. These are necessary, but the flows are much more beneficial to some groups than others. This leads to inequality in wealth and so on, and is driving calls for change.

Globalization helps in resource allocation efficiency and helps the whole community. But for a lot of people the pain can be very serious. That contributes to gaps in opportunities, gaps in income, gaps in values and political gaps.

Some cycles can go on in markets for a while. Yet, even as the underlying circumstances change, they still get excessively extrapolated.

Going into the financial crisis , for example, we in the US had short- and long-term interest rates above 5 per cent. It was a lot of potential to stimulate. That’s gone, now.

What is important to markets is what happens compared to what’s being discounted in.

You often see earnings growth extrapolated forward towards the end of cycles even when it’s unlikely for different reasons. For example, with the pushback against globalization and the unlikelihood of reducing corporate tax levels, this means margins are likely to secular peaks.

If margins contract, this will put more pressure on revenues to drive forward prices for risk assets. However if economies are weighted down by a burden of debt and productivity growth (only 1.2 per cent annualized over the past ten years) and labor market growth is weaker, this also decreases the probability of growth above-trend.

Extrapolation of current conditions tends to occur but is often unsuitable.

From 2008 through 2019, we were in a paradigm with lower interest rates and quantitative easing for about eleven years. This has reduced interest rates across the curve. Regardless of the existing value implications this increased risk asset prices.

You also had factors such as stock buybacks which supported stock prices. The interest rate on cash and other lending rates was low which led to their own shares being bought back. It can be like a situation of automatically rolling over the debt and not having to go through with debt service when interest rates get so low.

This was a very favorable time for businesses, with low interest rates, margin growth, individual tax cuts, corporate tax cuts, and so on.

These things can not be extrapolated indefinitely, because there is a limit to how far that can be pushed.

You won’t get any further round of tax cuts. Or another round with a major interest-rate cut. You will not be getting the same share buybacks level.

The tailwinds are now gone. Investing in an economy at a zero interest rate is a risk that all investors will have to face.

The powers evolve over the course of history, the ideologies evolve and the innovations change. But the same kinds of things happen again and again for the same logical reasons for cause and effect.

This period in the US and most of the developed world is analogous to the 1935-1940 period in various ways – with respect to monetary policy, fiscal policy operating within the context of polarized factions (more so than what’s typical), internal tensions (wealth gap, values gaps, political and ideological polarity), and external conflict with one power rising to challenge another.