On interest rates

A wonderful tiny paragraph from a article by Jeff Fischer. It seems so obvious, but reiterating it won’t hurt.
Saul

Interest Rates This is the bogeyman we imagine under the bed. Interest rates are currently so low that if the Fed increases them slowly by quarter-points, which seems likely, it could take years to get back to a historically healthy level of 3% to 4% (ideally a bit above inflation). A tiny increase in rates this year won’t suddenly make stocks unattractive, and it won’t derail the economy.

http://newsletters.fool.com/1228/coverage/memos/2015/08/24/c…

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Saul,

Conspicuous by your “absence” over the past week or two.

You are a steeled reticent sage.

Thanks to you for founding this great board and sharing your craft with us.

Thanks to the many others who make purposeful and pithy posts here.

Here’s to more and bigger winners and fewer and smaller losers.

Keep on keeping on,
KLVanLiew

Hi Saul,

Since the 60’s, inflation and interest rates have been somewhat correlated as seen in this chart:

http://www.crestmontresearch.com/docs/i-rate-relationship.pd…

If one believes (as I do) that inflation is inevitable given exploding government debt, then rising interest rates must surely follow. I totally agree with Jeff that small interest rate increases by the Fed are a tempest in a tea pot. But I also think that interest rates near zero have contributed to the bull market of the last 5 years. Once interest rates start to rise, Baby Boomers will move more of their retirement funds from stocks into safer assets for retirement. I know that I have already started moving money into TIPS for the portion of my portfolio that I’ll use to maintain my current lifestyle.

The next 5 years should prove to be very interesting…

DT

that inflation is inevitable given exploding government debt

DT, The inflation doomsayers have been saying that every year, but no inflation. Doesn’t that make you wonder?

In fact the real danger that the Fed is worried about, and that is holding them back from raising interest rates, is deflation (like Japan had for 20 years). There is NO inflation at all.

Besides, the debt is NOT actually exploding, but has fallen every one of the last seven years as a percentage of the gross economy (GDP). That’s fallen, fallen, for seven years, and is now back in what is considered normal range. Check it out, don’t just listen to the doom-and-gloomers.

I don’t see the debt as causing us any problems in the immediate future, but that’s just my opinion.

Saul

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We had an interesting article this past weekend in The Seattle Times on why government debt is good especially during these low interest rates:

http://www.seattletimes.com/opinion/why-debt-is-a-good-thing…

"The United States suffers from obvious deficiencies in roads, rails, water systems and more; meanwhile, the federal government can borrow at historically low interest rates. So this is a very good time to be borrowing and investing in the future, and a very bad time for what has actually happened: an unprecedented decline in public construction spending adjusted for population growth and inflation.

Gary

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Saul,

I couldn’t find any data to support this statement:

the debt is NOT actually exploding, but has fallen every one of the last seven years as a percentage of the gross economy (GDP)

I DID find these sites:

http://www.justfacts.com/nationaldebt.asp

http://www.tradingeconomics.com/united-states/government-deb…

which have the current government debt as a percentage of GDP pegged at around 100%, having steadily risen in recent years. The only other time it has been that high (at least since 1790) is just after WWII when it hit 120%. Are we talking about the same thing?

Don’t get me wrong, I am not a “doom-and-gloomer” and do not claim to have a crystal ball, and perhaps “exploding” was the wrong word to use to describe government debt. But it seems clear that it is rising at a pretty steady clip.

Another interesting chart shown at the first link’s website is this one:

http://www.justfacts.com/images/nationaldebt/expenditures_fu…

This shows how spending on social programs has gone from 20% of the budget in 1960 to about 60% now. As baby boomers continue on into retirement, I have to think that this number will only grow.

Again, I am not saying that government debt is necessarily a bad thing, and in fact might be necessary to a certain degree. But sooner or later, that debt must be repaid, and IMHO rising inflation (and interest rates) will be a part of that. How that will affect the investing landscape is the question.

DT

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Saul,

Considering the fall in commodity prices, and the stagnate wages and the sub-replacement birth rate, interest rates are already, even a zero, near 4 percent above inflation.

Cheers
Qazulight

deflation (like Japan had for 20 years).

I have been going to Japan at least once a year for the last 11 years and it is odd to feel this. Most prices for day to day items have been static overall. My bus ride from Narita to Shinjuku was 3000 yen back in 2004 and is still 3000 yen in 2015. Even though the government tries, they can’t seem to grow the inflation or the population.

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Morgan Housel wrote a great article for MF One a few months back about inflation and why we haven’t experienced it:

http://newsletters.fool.com/1255/exclusives/2015/06/11/where…

Here are a few sentences:

Inflation goes up when there’s too much money chasing too few goods. Simple supply and demand.

Virtually every historical bout of hyperinflation has been caused by the latter half of that equation.

History will show that it’s hard to get hyperinflation just by increasing the money supply — you also need to decrease the amount of goods in the economy.

Neil

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Look DT, we are in the midst of FALLING commodity prices, FALLING oil prices, and ZERO inflation. How do you see INFLATION as any current danger at all? Here’s a quote from today’s editorial in the NY Times European leaders should be trying to stimulate their economies with public spending, but they are not doing that in a misguided attempt to reduce their budget deficits. Well duh… of course they should be increasing public spending, especially when they can do it at minuscule interest rates, instead of trying to decrease deficits. The US should be doing it more too, when our infrastructure, roads, bridges, dams, etc are falling apart due to misguided attempts to reduce government spending. Our danger is falling prices, not a bogeyman inflation.

Best,

Saul

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And then there are those of us who admire those great Founding Fathers, Thomas Jefferson and James Madison - and still think they were right about the role of the state!

When they look down on the great republic now, modelling itself ever closer to Europe, what must they think?

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And then there are those of us who admire those great Founding Fathers, Thomas Jefferson and James Madison - and still think they were right about the role of the state! When they look down on the great republic now, modelling itself ever closer to Europe, what must they think?

Hi streina, I don’t have a clue what they’d think, I know Thomas Jefferson envisaged the future US as a rural country of small farmers, which was already gone by the time he died, but I don’t see us modeling on Europe at all. I think Europe should model more on us. They are mostly socialist in their basic philosophies, after all, and young european entrepreneurs come to the US or England to start a business instead of dealing with the myriad of red tape and regulation in France, for instance. Companies don’t hire in France because of the difficulty of reducing the workforce because of all the socialist rules, if the company should need to at some point in the future, etc.

However, the worst thing for governments to do in a recession is to cut spending. The European governments did just that in the great recession, with their self-righteous “austerity”. The US did the opposite and stimulated the economy. We have been growing for six years and have an unemployment rate down to 5% or 6% or so. The European countries are happy if they grow 0.2% per year, and the unemployment rate is still around 12%.

Why do I say that the worst thing for governments to do in a recession is to cut spending? (Well, I thought everyone KNEW that for starters). The reason is that your spending is my income. When the government repairs a highway or a bridge, or builds one, they pay workers and suppliers who manufacture materials. The people who are paid buy new cars and new refrigerators and more services. The people who are paid by their spending go out and buy more fruit and vegetables and milk and clothes, and the people who sell it to them and work in stores and manufacture it, and grow it, go out and buy new tractors and Starbucks coffee and…etc etc, and at the end of the year, the government taxes all this income and gets back in taxes most of what it spent to get the ball rolling.

When the government doesn’t spend in the first place, or cuts spending, the people who would have worked on the bridge have to cut back, so they don’t buy the new cars and refrigerators, and the workers who made the new cars did’t have as much work and cut back and don’t buy as much fruit and vegetables and milk and clothes, and the farmers who would have sold it to them cut back and don’t buy new tractors, etc, AND, the KEY POINT, the government doesn’t make as much in taxes, so the government deficit goes UP when they cut spending, not down!

You see it in most countries in Europe. They opted for “austerity” and trying to cut deficits! In a recession! They cut back spending, their economies stayed in recession, their deficits have grown, their people still feel poor and don’t spend money. It’s a vicious circle. It’s only in the last year or so that some brave souls are finally saying “This Austerity doesn’t work!” Well DUH… I thought everyone knew that from the start.

Best,

Saul

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Saul said: <<I think Europe should model more on us. They are mostly socialist in their basic philosophies, after all, and young european entrepreneurs come to the US or England to start a business instead of dealing with the myriad of red tape and regulation (…) the worst thing for governments to do in a recession is to cut spending. The European governments did just that in the great recession, with their self-righteous “austerity”. The US did the opposite and stimulated the economy. We have been growing for six years and have an unemployment rate down to 5% or 6% or so. The European countries are happy if they grow 0.2% per year, and the unemployment rate is still around 12%>>

I can’t agree more with you!
It is even worse than that here in Spain. A perfect example of the European endemic political myopia to see what is common sense from most of us.

Saul, take good care of you!

Best

Maria (who misses your posts a lot during those hard days)

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I can’t agree more with you! It is even worse than that here in Spain. A perfect example of the European endemic political myopia to see what is common sense from most of us. Saul, take good care of you!

Thanks Maria, so much, for your kind words!

Saul

Saul,

Thank you for these words of sanity and intelligence. The idea that government spending should always be cut is just as ridiculous as the idea that it should support everyone. I wish I could recommend it until the counter overflowed. Fortunately for my mouse button I can only click on it one time.

Side story relating to government and taxes…we recently looked at moving to Austin Texas (from Oklahoma). Texas always seems to brag about how they have no income taxes but with property prices and tax rates on those properties (unless you are rich enough to protest, from what I hear) I calculated we could be paying 2-3 times more in state taxes than in federal income taxes given our situation. I’m finding that hard to swallow. I much prefer a mix of income and property taxes to what they have.

Steve

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Saul,
You wrote:
How do you see INFLATION as any current danger at all?

I don’t see inflation as a current danger at all, and certainly not a “bogeyman”. Rather, I see it as a distinct possibility in the future. As such, I am taking action now (when inflation is low) to lessen the impact of inflation when it does come.

The US should be doing it more too, when our infrastructure, roads, bridges, dams, etc are falling apart due to misguided attempts to reduce government spending.

Totally agree with you here. As a civil engineer, I get how spending on infrastructure pays dividends in the future. I’m totally in favor of more efficiently allocated public spending on roads, bridges, dams, et. The problem is that our government seems to be bound and determined to run up deficits on non-productive social programs. I think the problems in Europe have more to do with spending for the wrong things than lack of spending.

At any rate (pun intended), I appreciate your efforts and posts on this board, Saul. You have obviously been very successful at investing over the years, and I like your approach to buying undervalued growth stocks. The fact that you were able to stay the course after taking a 60% hit to your assets during the great recession speaks volumes.

Best,
DT

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I am familiar with the argument but think that even Keynes would have been shocked by Krugman in a way that Hayek was never shocked by Keynes.

In the end, I have no doubt that the Austrian School will (yet again) be vindicated.

We offer up the fruits of a vast global experiment in international debt to our children and grandchildren who, I have no doubt, will learn from it as they receive its blessings.

What a wonderful central banker Sir John Cowperthwaite of Hong Kong would have made! What a successful experiment that was! Just like America. Once.

I do not mean to provoke! The board is not with me. Let’s get back to investments.

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I think it’s worth noting that the UK made cuts in spending during the recession and our economy is doing fine, with unemployment down to 5.6% and robust GDP growth.

You only have to look to Greece to see the folly of continuing to spend when you’re massively indebted.

Alex

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I think it’s worth noting that the UK made cuts in spending during the recession and our economy is doing fine

If you’re “noting things” then you should note that the UK cut spending for two years, threw itself into a double dip recession, and then decided that maybe that wasn’t the best idea and started spending again. The pols spun it another way because after all, how could they say “Wow, did we screw this up!”

You only have to look to Greece to see the folly of continuing to spend when you’re massively indebted.

Taking such a lesson from Greece would be a terrible idea. Greece has two industries: tourists and olive oil. (OK, I exaggerate. It also has government workers.) The prescriptions for that economy are vastly different from countries which have advanced industries (including financial), factories, and crazy things like “manufactured exports.”

Different situations require - demand! - different approaches. Kodak and Fujifilm were both reliant on one product for the overwhelming majority of their revenues and profits. Kodak, well capitalized and thriving, is bankrupt. Fujifilm, undercapitalized and in debt, is doing very nicely thanks to adroit management, diversification, and yes, more debt.

There is no “one size fits all” cookbook - for companies or for countries. There may be some overall guidelines, but then we look at Japan, which has a much higher debt-to-GDP ratio than Greece, and conclude that maybe it’s not all that simple.

http://krugman.blogs.nytimes.com/2015/04/04/osbornia-revisit…

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Goofyhoofy

I looked up the same Krugman articles and was going to post them but thought it was too much politics and I KNEW you would come here and pick up the slack. Nice work.

Robert