My thoughts with the low interest rate environment today include;

What is the hurdle rate now? I.e. if debt gives you 1%, and equities are considered 2x riskier, is a 2% return going to be the norm for equities?

Apparently 1/3 of the global debt is now yielding negative rates. So what happens when companies are paid to borrow money? How high can they push up their share prices through buybacks?

Could the low interest rate environment lead to => oversupply in certain industries => industry players earning a very low ROIC, throw in the coming recession/slowing growth as a result of the trade war => weaker players go under => a spike in prices (oil, copper, shipping etc etc) => inflation => interest rates going higher => a “normal” hurdle rate returns?

Anyways back to the purpose of this post.

In this latest memo, he talks about the two different reactions to interest rates being lowered. Here’s some snippets and a link to the rest of the memo.

Finally, but very importantly, when interest rates are low, central banks don’t have at their disposal as much of their best tool for stimulating economies: the ability to cut rates.

Finally, when I hear people talk about the possibility that the Fed will prevent a recession, I wonder whether it’s even desirable for it to have that goal.

Source: Oaktree Capital

  1. Funny crazy times. Paul Craig Roberts would say “The best investment today is a highly leveraged fund that invests in large cap companies that are buying back their own stocks”.

    I think the natural cycle growth/recession is no longer accepted. Low/negatives rates will be the new normal. Expectations are so high no one wants to hear about slowdown, As Yellen said “no more financial crisis during our lifetime”.

    I jop I’ wrong, but world governance is weak, populism rise everywhere, so my guess is QE+ZIRP will be the new normal.

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