Interest rates in 2020 and beyond

Economic and financial affairs over the next few (5?) years might be useful to know.  In particular, knowing the rate(s) of inflation might be useful, especially if one has or is considering taking on debt.  When inflation is high, paying off fixed rate debt gets easier and easier as the value of the dollar gets lower and lower; conversely, during deflationary eras, fixed rate debt gets more and more expensive as the dollar gets stronger and stronger. Knowing what to expect might help individuals plan better.

What will happen over the next few years?  Knowledgable people are making an argument that a recession is unlikely, economic growth will recover (but only to a modest level) and the U.S. will enter a deflationary (or much lower level of inflation) era.  They suggest that interest rates will decrease and treasury bond rates will approach zero(0).  This would mean that the interest earned on new CDs, muni bonds, savings accounts, etc. will decrease and the risk of muni bond defaults (like the San Bernardino bankruptcy) could increase.  ( Link   Municipal Bonds Risk Management  ) Social security inflation adjustments might be zero (as in 2016).  

Who are the people suggesting decreased inflation or deflation, treasury bond rates near zero in a year, modest but improving economic growth, etc.?

1. Deutsche Bank’s Stuart Sparks Link
 Quoted from the link: That is, if the Fed’s trio of rate cuts ends up stabilizing the US economy, but the rest of the world continues to struggle, absent signs of life of the price Phillips curve, better US growth outcomes will end up pushing inflation lower via the currency channel. “Note that this is not a forecast of recession, the entire point is that it is no longer reliably appropriate to conflate growth and inflation outcomes”, Sparks says, before exclaiming that “In fact, we would place a reasonably high probability on a scenario in which growth recovers to trend and inflation falls anyway!”

2.  Credit Suisse’s Zoltan Pozsar Link
Quoted from the link: The problems he identified are twofold — a Fed that raised rates too much and cut its bond holdings and balance sheet too quickly, coming at the same time as Basel III international banking guidelines made capital requirements more stringent.  (Also "His analysis, however, is fairly contrarian.")

Other experts make different predictions.  I find the arguments which predict treasury bond rates near zero a year from now to be reasonable and I have to keep this possibility in mind as I plan for 2020.  For cash flow reasons, I would like to refinance some debt to a longer term.  If I wait a year, I might get lower rates.  Or not?

Note:  Credit card debt will always carry extremely high interest rates.  (I have no credit card debt.)

The low interest rates for so many years now has drastically limited the options people have had for investing, with the result that there has been a continual flood of money into the stock markets for almost 10 years, and which has artificially buoyed up the indexes. What do yer experts say about the possibility of flash crashes or just plain old crashes? One guy panics, and everyone panics.

Luckily, when the Crash of 2008 came, I had been moving money out of the markets for a full year, so didn't lose my entire life savings. At least, I believe the banks are now a bit more restrained in their lending practices, but who knows what goes on behind the scenes. Another CDO or CDS notional bubble of some sort?

Qxxx said:

The low interest rates for so many years now has drastically limited the options people have had for investing, with the result that there has been a continual flood of money into the stock markets for almost 10 years, and which has artificially buoyed up the indexes. What do yer experts say about the possibility of flash crashes or just plain old crashes? One guy panics, and everyone panics.

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All we have as a guide with regard to stocks, bonds, etc is history (of the stock markets, etc).  Should you trust history?  Only you can answer this.   

We had a "flash crash" in February of 2018. October 2018 and December 2018 were not that great either. On the other hand, someone who was invested (in an appropriately diversified portfolio) in the stock market in 1928 recovered their money in a few (5?) years.  I was invested during the flash crash on Black Monday and I didn't do anything. ("Black Monday, Oct. 19, 1987, was a day when the Dow Jones Industrial Average fell by 22% and marked the start of a global stock market decline.")

I do not recall reading any credible (in my opinion) "experts" who are predicting flash crashes but then I do not listen to Jeff Gundlach.

This article on Retirement Risk Assessment: History Is Not a Guide might interest people.  Perhaps the most important point is illustrated in these sentences: "The 1966 cohort, which has the worst failure rate, does not have the worst average return. This is an indication that sequence risk played a role – poor real returns (including effects of high inflation) early in retirement."

Sequence risk is the danger that the timing of withdrawals from a retirement account will have a negative impact on the overall rate of return available to the investor. This can have a significant impact on a retiree who depends on the income from a lifetime of investing and is no longer contributing new capital that could offset losses. Sequence risk is also called sequence-of-returns risk. Link

In the first link in this reply, the earliest age of failure was 93 (for the 1966 cohort).  Will you (or your spouse) live to be 93?  Maybe this isn't a huge concern for you?

Thanks for your insight. I believe flash crashes are limited anymore by the markets closing trading until emotions cool down, but that wouldn't necessarily apply to longer term crashes. In 2008, it took several months to go from about 12,000 to near 6,000.

https://i.dailymail.co.uk/i/pix/2012/02/28/article-2107863-11F696FA000005DC-91_468x325.jpg

You appear to be in the group that says, "it always comes back, so hold fast for the long term". I'd probably be that way too ... if I had a "lot" of money to invest.

Are you not at all worried that there are so few options for investments, due to the Fed having sustained low interest rates for so many years, so that the markets are not hugely over valued? What do the experts say about that? And I don't mean glossing on what "over valued" means, I mean a fact of life that investments are artificially being limited.

Also, are you worried or not about the massive $20-trillion Federal Debt that has built up? After all, it's encouraged by such low interest rates. If the rates were high enough to encourage investing in something other than stocks, then the gobmint would be paying $1 trillion or so every year in interest on the debt. It's a vicious circle.

SLB_SA said:

In the first link in this reply, the earliest age of failure was 93 (for the 1966 cohort).  Will you (or your spouse) live to be 93?  Maybe this isn't a huge concern for you?

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Thanks, I'll look at those links. In regards to 93, hell, I'm happy to still alive every damn morning.

I am extremely worried about the federal deficit. On the other hand, the only place where one can keep up with (high) inflation (over a five year period) is probably the stock market. I am not sold on Treasury Inflation-Protected Security (TIPS) and I am a "buy and hold" (and sell/withdraw when I need money) person.

I am (somewhat) locked into a very conservative financial situation. About 60% of my funds are locked up in an account which pays over 4% per year but is very illiquid. My equity funds (=40% of my portfolio) are spread among international funds (because I expect the federal deficit to reduce the value of the dollar), small caps (historically higher rate of return than S&P 500 funds), growth funds (driving the market for a decade), real estate funds (that's REIT), etc. It would take a decade to withdraw all of my funds from the 4% paying fund. In the long run, when high inflation returns, those 4% returns will look terrible but they look great right now. When should I move them? This is a huge question for which I have no answer.

Qxxx said:

Are you not at all worried that there are so few options for investments, due to the Fed having sustained low interest rates for so many years, so that the markets are not hugely over valued? What do the experts say about that? And I don't mean glossing on what "over valued" means, I mean a fact of life that investments are artificially being limited.

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The world is awash in money, thanks to the ECB, BOJ, Fed, etc. and this is a fact of life.  The search for yield appears unstoppable. (This is a June 2017 article and the financial world changes every single day.)  Yield drives the boat and until central banks change their policies, p/e ratios will remain high and stocks will be expensive.  In the long run, earnings will determine stock prices and many companies are doing okay in this regard.  I am not greatly worried about this issue.  (On the other hand, I am waiting for a crash to start moving the 60% of my portfolio to equities.)

SLB_SA said:

I am extremely worried about the federal deficit.  On the other hand, the only place where one can keep up with (high) inflation (over a five year period) is probably the stock market. 

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I basically agree with you here, which makes me somewhat worried about stocks being artificially channeled as the single best option. Both parties are so set in their ways, that nothing will curtail growth of the Debt. When will the reckoning come? When it gets to $30 trillion, which is not for very long on the horizon, the way things are going.

You obviously have much more investment than me. At my age and with my very limited retirement funds, I am more interested in sustaining capital than in long term growth. So I am more prone to get out a lot sooner. Young people can afford to wait 10 to 20 more years for recovery, but not this little puppy.

Qxxx said:

You obviously have much more investment than me. At my age and with my very limited retirement funds, I am more interested in sustaining capital than in long term growth. So I am more prone to get out a lot sooner. Young people can afford to wait 10 to 20 more years for recovery, but not this little puppy.

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I'm 65 but I hope to have 20+ years in front of me.  I will take social security at 70, which should cover all of my expenses, and then just let my investments grow.  (Of course, this means that I am drawing down my retirement accounts right now and I can only access the 40% part of my portfolio in equities.)  Once I turn 70, I want to grow my portfolio as much as possible; I am willing to accept risk and the downturns that go with higher risk.

If you are younger than 70, your goal "in sustaining capital (rather) than in long term growth" might leave you short if you live another 20 years.  Right now, sustaining capital is my (temporary) goal.  My financial advisor always says "But what if you live to 95 or 105?"

Yeah, I know all the arguments. Your advisor sounds like they gave good advice for your particular situation, which I ascertained from listening to your arguments, . Everyone I know who was rather well off waited till 70 to take SS, and then the other 90-95% of course took it early.

I know we can't do anything about the powers that, but it's just amazing to me that the more well off people are pulling down $30,000 apiece from SS, while many in the other group are getting only about $6,000 a year. Somehow the whole damn system got perverted in favor of the rich.

I’ve mentioned this before.  I am retired (70) and use the bucket system. At the start of each year I have one bucket of cash (i.e. money market).  This bucket is funded by my RMDs and a second bucket of near cash in the form of Munis.  The purpose of the second bucket of Munis is to provide just enough interest to overcome what I think inflation will be. The ‘Muni Bucket’ has enough funds in it to cover four years because I think that would be the length of most recessions.  My two retirement accounts (IRA and ROTH) are more aggressive.  My last account consists of stock funds.  

I no longer manage my portfolio, but instead are managed by Mercer Advisors.  To date they have achieved a growth which exceeds my expenses, so I’m willing to let them continue.  

However even if I were managing the portfolio, I would still use the bucket approach to manage my assets as that way I feel more comfortable with it and it allows me to take a greater risk (i.e. growth) with a significant portion of the portfolio.

Sounds good, offhand will you say how much interest are the Munis paying and when did you get them? I remember back in the late 70s, some guys I know locked in 10 or 20 year Munis that were paying 20%. Woof.

Times were good for Money Markets in those days too, 16% or so. Before Volcker came along and instituted monetary policy at the Fed. I was looking at my accounts today, and didn't realize I still had anything in the money markets. Amazingly they paid 2.2% or 2.5% the past year. After a decade of 0.01%.

https://www.wsj.com/articles/paul-v...-for-nearly-three-decades-is-dead-11575901675

Qxxx said:

I know we can't do anything about the powers that, but it's just amazing to me that the more well off people are pulling down $30,000 apiece from SS, while many in the other group are getting only about $6,000 a year. Somehow the whole damn system got perverted in favor of the rich.

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I completely agree with you but it is worse than you stated.  Nobody would consider me to be rich; my wife and I lived in a cheap two bedroom house with two kids and struggled at times.  I started working at age 14 and worked until I turned 63.  Yet your $30,000 figure is too low.

If you prefer some doom and gloom, watch this video Blackstone's Joe Zidle says good times won't last and ask why the "experts" rarely agree.  I don't trust any of the experts but I especially distrust hedge fund managers and other financial "experts" who are selling something.

Here is a video which attempts to explain the article "Global Money Notes #26" by Zoltan Pozsar.

SLB_SA said:

Here is a video which attempts to explain the article "Global Money Notes #26" by Zoltan Pozsar.

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I listened to that Heretic guy's video. I give it a 2 out of 5. But thanks for the link, I always like to watch different stuff.

First, I'm not into normally spending a lot of time thinking about money. I just have a few investments and adjust them a couple of times a year. At my age, I have other things to do besides interminable worrying. IOW, I know what I have, and I try to live within my means, just as I've been doing my whole life.

Secondly, how many times have we heard the same damn thing ... short-term brouhaha is going to go out of control and lead to a "possible" long-term systemic collapse, so ... ta-da, ta-da, ta-da ... all the really smart people are buying gold. Sheesh. IOW, when the panic comes, you my prescient listeners want to be WAY OUT AHEAD OF IT. 

But it was fun, nonetheless. Just like in 2008, I expect the Fed will not sit on its collective butt and simply watch passively as the system collapses. Eg, Bernanke saved the whole damn universe in 2009 by buying up $2-3 trillion in generally worthless and defaulting MBSes, after Hank Paulson and everyone else's brains exploded, and not one of those SOB bank CEOs ever went to jail.

Qxxx said:

I know we can't do anything about the powers that, but it's just amazing to me that the more well off people are pulling down $30,000 apiece from SS, while many in the other group are getting only about $6,000 a year. Somehow the whole damn system got perverted in favor of the rich.

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SS has always paid out according to how much you put in.  SSI, however, pays out according to need.

I've deleted the posts with political references.

I don’t think the Fed’s prime interest rate is the key factor.  Oh it’s important in keeping the banks liquid.  

I think the key is what is the yield on TBills.  Since TBills are auctioned, the delta between the face value and the auction price is the effective interest/yield.   If major banks and investment groups are not willing to pay within a 1% of the face value, then the effective interest would increase.  And if the interest rate on TBills should increase, then the interest rate on CDs and MUNIs would have to follow suite, but at a higher interest rate because of the risk factor.  So if the ‘big boys’ decide not to pay so much for the TBills during their auction, then that would cause most other interest rates to rise. 

So the real danger in the US debt is if the ‘big boys’ think that it poses an increase in the risk of a default on US payments.  

But I don’t see that happening - at least not as long as the major indexes trailing PE remains fairly normal.   

Now if the GDP should start to drop significantly, then all bets are off. But there are no signs of that happening - not with the current employment rates and consumption levels. 

But then again - what do I know???