The problem with zero interest rates?

Interesting article below by Joseph Stiglitz, writing for the Guardian, about zero interest rates from an economic standpoint.  From the point of view of markets, however, it may be a positive.



Adam Fayed

Unexpected changes on interest rates

If you would have told most investors at the start of the year, that government bonds and gold would be two of the best performing assets in the first few months of 2016, very few would have believed it.  This once again shows how it is impossible to time markets.

We do seem to be going into a new world, if negative interest rates and more QE is produced.  Unlike 2009, however, this doesn’t automatically mean that markets will go up significantly.  US markets in particular, have gone up so much, that many investors my feel that the gains have been `priced in`.  It seems even more unlikely that markets will double from here, like they did from the bottom in 2009, than the aforementioned start to the year.

Moreover, negative interest rates will, for obvious reasons, have an impact on the profitability of banks, which are some of the biggest players on the world markets, with banking shares down significantly since December in Japan and the Eurozone in particular.

However, what has changed is the idea that steep interest rate rises were coming.  Last year, few people believed rates would return to 5% in a few years soon, but a gradual increase to say 2% was seen as a possibility.  With inflation pretty much 0%, many conservative investors may have settled for 2%.  The idea of such interest rates in the developed world could be 10 years or so away, and thus markets may gain on the obvious fact that there isn’t an easy alternative for their money.

Either way, time in the markets is more important than timing the markets.  As much as some things change, some things remain the same.