You sir are a gift to people like me who can only hope to learn from you. I'm only CFA level I qualified so my knowledge about this is not enough to completely understand everything you taught but I was able to learn a lot from this. Thank you Sir
The CB sets a target rate then lends and borrows at the bank and overnight rate, which are 25 bps above and below the target. It is the open market activity that targets the rate.
@@MarkMeldrum Hi Prof Deldrum, recently found your channel and just had to subscribe for the amazing content. I wanted to ask what you meant at 5:35-5:39 where you said that banks were "exempted" from Switzerland's negative rates. Given the mechanism for implementing negative rates being the bank and overnight rate, how would such an exemption work?
Hello Dr Mark, Thoroughly explained much appreciated. I have three questions. 1) Since lower rates has positive wealth effect on people in western world where most of the people own assets that appreciate with lowering interest rates like equity, bond, house etc. so shouldn't consumption increase. Unlike in Asian country, where lower interest rate has lowering wealth effect where most people invest in interest bearing assets. 2) What your take on the effects of AI and machine learning on investing profession. 3) whats your take on dollar. If there will be negative interest rates. Will it affect the willingness of other central banks to hold dollar in their reserves beyond the trade requirement. especially when US treasury department is quick to label countries as currency manipulator, if they try to keep their currencies undervalued Thanks
1. for a wealth effect to have real effect, you actually have to wait for those assets to deliver a wealth effect. Since the downturn, neither housing or equity prices have hit new highs. 2. No take on it - it is what it is. 3. Another CB holding USD won't have a negative rate unless they are in a negative yielding asset. Currencies are almost impossible to forecast. Any forecast is just a guess, and it has a 50% probability of being right.
Excellent work as always, earned my charter several years ago (with help from your courses) and find your content very useful for continuing education - keep up the good work!
Mark, thank you. Excellent video with good flow! Thanks for putting this together. For me, there is one unexplored area which relates to capital adeuqacy and liquidity ratio as prescribed by the Basel accords. I will be watching this closely if and when negative rates are implemented in the U.S. and/or the U.K.
- Regarding your final comments: Do you think valuation will turn from relative to absolute when interest rates go back up (if that ever happens) or some other trigger? - Totally agree with companies not taking credit now due to abysmal current demand. But based on that logic, if demand does start increasing again, wouldn't the large amount of credit available stimulate a equally impressive comeback? Is that the so called V shaped recovery everybody keeps talking about? - There's something that feels wrong about piling onto equities based on the primary argument that there's nowhere else to go, despite knowing that fundamentally valuations doesn't make sense. Heck by that logic, I can see a strong argument about going into high beta stocks since everyone is piling into equities. - I feel that with the transition to relative valuation, risk is also being looked at more from a relative perspective now. And that's a scary thought personally. I can see heightened volatility sustaining moving forward because of that, which would counter the historical trend. -Swim under the sharks, haha I'm adding that to my investment tenets.
Awesome job Doctor, you just gave many perspectives and very logically make connections between what I'm studying specially in CFA program to real life economics. As a newbie in finance you motivate to be even keen at observing and analysing the state of economy.
4 ปีที่แล้ว
Your content is so valuable. Thank you very much and best regards from Germany
Fantastic episode! Just a quick one - from a theoretical point of view, I agree with absolutely everything, from a practical vantage and specifically looking at Europe and the implications that has had/ is having on their economies, do you believe negative rates in the US sounds the alarm that there would have to be a sort of secular stagnation environment going on that forces the Fed to go negative? In that environment, do earnings declines offset the increase in payout and yield generated. Also, do you think the convenience yield of cash and doing business in cash renders neg rates obsolete? Thanks and firmly swimming under the sharks!!!
If the US uses negative rates for stimulus, then yes that could signal that conventional monetary policy has reached it limits. I would expect the Fed to give a lot of lee-way to fiscal policy first. If monetary policy is impudent at the zero bound, fiscal policy could take over. But that relies on a bunch of loser do-nothings to suddenly become smart and do the right thing. We do not elect qualified people to office, we elect popular people. So maybe the Fed will have to do ALL the heavy lifting. In that case, you could forecast possible deflation - which is NOT as bad a thing as theory suggests (both rounds of deflation in US history were con-current with above average economic growth and stock market rallies). I do not see stagnation for the US - I see adaptation and innovation. You cannot use deterministic linear forecasts for strategic actors. You have to move from economic models to game theoretic outcomes.
@Mark, thanks for the fantastic video! What happens to the repo rates and mortgage lending rates in a -ve interest rate environment? Any insights on that one?
For mortgages, it depends on how the rate is set. In Denmark, mortgage rates were set in capital markets, so it was possible for short term mortgages in that country to experience negative rates even after fees since negative rates didi flow through to capital markets. In the US, banks set the mortgage rate, which is often pegged to the 10-year rate. Under an originate and sell model, I am not sure negative rates would work since much of the system is simply not setup for reverse interest payments. The infrastructure would probably offer a lot of resistance to negative rates. As for repo rates, not sure there. I believe they have gone negative in countries that have used negative interest rates. Maybe an institutional investor can confirm that for me.
Hi Mark, Literally viewed this as soon as you uploaded. Thanks for making this video. Question/corollary: I think that it would actually tie in really well to both the Level I and Level II curriculum if you could talk a bit out *what negative interest rates could/would do to the current global reserve currency, in today's case the US Dollar* (I know it's a hot topic but I do *NOT* mean to tinge it with any political tint. I mean just looking at it secularly.) A deflation event is coming due to the depression caused by the Coronavirus pandemic. The Fed lowered interest rates to zero to facilitate government indebtedness. However in a deflationary regime, real rates go steeply positive, making now all-time-high debts (not only in absolute but in relative terms i.e. %-age of GDP) even more burdensome to service, which was exactly the opposite of the Fed's intent. One may think that a quick solution to this is "just print more money," however there is over $12 trillion eurodollar (simply defined as US dollars held outside the US banking system) debt, and those folks cannot print their way out. Deflation would logically shrink the monetary supply just as the entire world has more USD demand than ever - and over $1.8 trillion of that USD-denominated debt ex-US matures in the next 12 months. The only solution is for the Fed to therefore take nominal rates below zero, in order to keep the real rate at zero. What are your thoughts on this? Both the odds you put on this happening and the ramifications thereof? I think it's a fascinating (and somewhat terrifying) proposition. Would love to hear your thoughts. Thanks!
What is your view on holding gold? I see there is a trend of countries accumulating gold recently and it probably happens to financial market soon. Also gold stocks seem like a great choice since they are hiking their dividend
You are an incredible educator Mark. I really admire that but one thing as u are right that equities dividends are the best destination relative to elsewhere , would that be applicable to all markets or countries?, or could there be other heavens which the flow of cash can drain to?
Great video Mark, thank you. I highly recommend Richard Koo’s books on balance sheet recessions on the point of low credit demand after this kind of shock. Also, a very interesting documentary is “Princes of the Yen”, can be found here on TH-cam.
The bank's curve is the treasury spot curve. From that they add spreads for credit risk. On a flat curve, there is little spread between what they can borrow for on the short end and lend out at on the long end. That gets even worse for floating rate loans.
Thanks for insight. Just thinking if you can expand a bit on the negative rate in relation to the consumer debts given the GDP is pretty much driven by consumer spending which is driven by increasingly debt. If income and productivity is increasing as fast as debt then what will happen eventually? What about zombie companies that can not surivive even a modest interest rate rise.
Great video Dr. Meldrum. I was wondering with everybody being push into riskier assets, doesnt that make emerging markets very attractive? Higher real growth, higher yield on capital (in theory). Although it seems like for the last 2 years, the US has just been sucking all of the capital and emerging markets have underperform. Is it fx related or just that investors were anticipating economic softness (late-cycle, trade-war) and took refuge in the US? Thanks
Hello professor. Why will people not buy gold as a store of value? Also alternative investments like bitcoin, commodities , real estate would potential see more inflows. Please correct me if I am wrong. My main question being why not look at gold as a store of value for an investor looking at a risk-free return. In India many individuals have always accumulated gold at every possible price to store their wealth, not really looking for growth. Farmers and seasonally artisans have done the same historically. Kindly correct me if I am wring anywhere. Thanks.
Gold is in a bull market now, so gold is being purchased. Bitcoin is not. It is really just still a novelty and I don't see that becoming mainstream. As far as AI, they are being purchased. Commodities right now have no real demand, so their price will respond to economic growth, not just a search for yield. They have no yield, only return when demand is there.
Dr. Meldrum I am curious what a couple of your favorite finance publications are for keeping up with current financial events and data. Appreciate everything you do! Thank you!
Low interest rates have been a thing in Taiwan for more than a decade (so central bank can deter the currency from appreciating), and that has cause asset prices (especially real estate) to more than 3x. As a young individual in his early 20s, this has honestly made me quite pessimistic about my future… I was wondering what your opinion would be regarding the possibility and feasibility of central banks around the world (especially those in low interest rate countries) raising interest rates in the future? Wouldn’t they be wary of doing so because asset prices would fall drastically? And wouldn’t this just lead to a vicious cycle of low interest rates forever?
@@MarkMeldrum Negative interest rates. Rates and account thresholds vary. Here is an example from the largest bank. danskebank.dk/en/personal/ratechange
Great video Dr. Mark, do you have any thoughts on how macro currency flows will be affected if the U.S. resort to negative rates? Is there any evidence to suggest a specific level of negative interest will deter flows from treasuries, and investors instead accept increased risk in EM for positive nominal rates?
Dr. Meldrum, Great video, very informative content. One question that I didn't see posed yet, I'm currently studying FI for Level 2 and noted that the interest rate tree is built around an assumption of non-negative interest rates (lognormal binomial tree). Is there any impact on valuation assumptions if we assume that intrest rates do go negative?
No. You would just add them in and follow the math. You would have discount factors > 1 meaning the PV of a cash flow would actually be higher today, not lower. So you may be in a position where you are indifferent between 1.02 toady and $1 a year from now with a -2% interest rate.
Great content Dr Mark! On a somewhat related matter, it's typically said that when interest rate comes down, bank's profits will be negatively affected. i think in general, most loans are on variable rates with margin sort of fixed against some benchmarks. If that's the case, how can bank's profitability be lowered? is it due to the fact that cheap source of funding which is deposits will be withdrawn and placed at asset classes with higher return? And assuming bank have sizable fixed rate loans, won't the lower interest rate will widen bank's profit? Or is it because when interest rate is lowered, it is with the assumption that economic conditions have worsened more allowances have to be allocated and that lowers the profit? Thanks in advance! Would appreciate if anyone else can share your views. Thanks!
Question. If a company had a lot of money but also a lot of debt wouldn't it incentivize those companies to just pay off their debt because they are being penalized for having cash. I can see major companies like apple just paying off all their debts then doing stock by-backs and higher dividends, and companies that have high debt just not paying off their debt because there is no incentive to pay off debt if interest rates are negative. I'm sure there might be reasons that this wouldn't happen like for tax reasons. Furthermore won't a company having less cash make it have higher risk unless it has no debts. Let me know what you think.
Hi Mark - @24.00 how do you mean large scale asset purchase will drag down NIM - by low yielding investments they must make as opposed to lending said money?
Hi Dr. Meldrum, Appreciate your outstanding video! I have a 50/50 SPY/TLT portfolio sitting in my RRSP account for a while. May I ask a quick question. If the rate gets raised by Fed, I think in the short term TLT will decline, may I ask what would TLT do in the long run? Thank you!
They variable cost the buying a safe theory and pulling our your cash from banks in times of negative rates makes sense to just keep @ the bank.. but if negative rates were to persist, say more than a year like in Japan, wouldn't it make sense for smaller consumers to take out and hoard their cash?
Dr Mark - Interested to know your opinion on what role Bitcoin will play given the extraordinary printing of money and the potential scenario of the USD losing its value ? Thank you for this. I was eagerly anticipating your views on negative interest rates.
Dear Dr Meldrum, You said that negative rates would not have stimulus effects on real economy, but it would have some effects on asset allocation. As a result, people would keep allocating in equity because it could bring better yield/ return. So, would that be some kind of bubble? Because the real economy is not going to improve how ever the shares are rising?
Insightful, thanks for the video! I would have loved to hear you on holding/adding some long term US treasuries (like TLT etf) right now in case yields become negative. Would it be a bad idea to hold those treasuries until either yield rises /stabilizes in negative territories or when equities become "cheaper"?
Hello sir very good content. What are other tools available With central banks if negative int rates do not help stimulate economy. Also in this market we see fiscal stimulus as well as monetary stimulus. How does that affect economy , valuations and asset allocations. Will help if you could add that angle here
Hello professor. Wouldn't people invest less now? Jobs are lost, people getting handouts will more likely use it to spend and survive. Wouldn't that lead to lower inflows into assets and more outflows to facilitate basic necessities like food , shelter. Curious to know your take on this
Institutions are by far the biggest money out there. Retail is small. Does not matter what the individual will do, it is what the institution will do. Besides, millions and millions of American invest every two weeks through their pension contributions. That cash flows into manger accounts and then into assets. Every pay cycle, hundreds of millions of dollars flow into bond and equity funds.
Ferro on Bloomberg ensures he differentiated between Policy Rates/issuance rates vs the Market's current yield on government bonds. Could you provided a brief explanation? Also, will this shift more demand to positive-yielding Investment Grade debt?
What do you think could be the solution to get out of low growth environment. I am assuming that there is low inflation in the economy which is causing a negative interest rate. I believe one of the solutions could be attacking it from the fiscal side rather monetary. Your views ?
Amazing video. Thank you! What are some resources you would suggest us to use in order to increase our knowledge efficiently on real world issues, enabling us to do analysis such as what you just did? I’m doing my 3rd CFA exam this December, but in order to relate the topics to real world, would you suggest books, academic papers, or news articles? Any particular suggestion on rates and its global effects for the recent years?
I would add 2 things: Start trading and read more annual reports. At least this seems to work better for me than just reading Financial Times or books.
I think its because when the central bank buys assets, the price of the assets increase, which means the yield of the assets decrease. If the yield of the asset decreases, that area of the yield curve (decreases) flattens. When central banks buy assets, money is added into the system, when the supply of money in the system increases, the cost of loadable funds decreases...
Excellent presentation, many thanks! What I think is missing however is how government tax policies are going to affect asset allocation in a negative interest rate environment. When (not if!) the government raises corporate and dividend taxes, would there still be enough money left for companies to give back to shareholders? Could in such a case zero yielding investments appear more attractive in terms of risk-reward ratio? I would be very interested in your thoughts on that. Thanks again, your chanel is the best in financial education i've seen so far!
If taxes were raised, the most responsible thing to do would be to weight the capital structure far more in favour of debt. Issue debt at low rates, use that to buy back stock to change the capital structure. The cost of debt drops as tax rates increases. So lower cost of wacc. Europe has much higher tax rates than the US, and as a result companies tend to use a much higher level of debt in their capital structure. Higher taxes raise the risk of insolvency for the next crisis. That means even more bailouts. Push one lever, another pushes back.
@@MarkMeldrum Very grateful for your reply! So it seems we are in a vicious circle. Governments and companies will keep piling up dept at very low rates, while stock prices go to the moon. Doesn't look very sustainable in the long term. But I guess the best play is still to stay in quality stocks and be prepared to get out before some paradigm shift starts - after all even the mightiest shark ends up as food for other fish.
Would the banks benefit when making loans at a negative interest rate if we assume a deflationary environment (which is likely to persist until the loan term) ? That is to say could the real return be positive amidst deflation and negative interest rates while making loans ?
Mark, what about lower valuations in European and Japanese equity markets since negative rates have been introduced? If we buy into the narrative that negative rates would mean (much) higher valuations why aren't we seeing it? Theoretically as rates go lower (and negative) P/E ratios would have to rise to infinity as earnings yields fall towards zero. Emprically, there seems to be a certain floor in earnings yields in Japan and Europe that even rises as rates go negative. I can't seem to square this circle.
Japan's Nikkei has increase from 2011, as with the DAX since the ECB went negative. Rates have dropped in the US continuously for 40 years while the average PE has risen (not to infinity) and equity market prices have increased almost 700%, not counting re-investment.
Population demographics and culture are two biggest factors of economic growth. Once you have a declining population growth there is no way your GDP will grow at the same level as when population was growing a 7%. Then the GDP growth is highly dependent on consumerism culture and manufacturing for demand outside your own country. But looking at current scenario how global trade is getting less and less favoured by those who are in power you need huge demand growth from your own country. That is why small European countries are in trouble and countries like India can thrive.
Dr. Meldrum, from your video we know that Fed might force the bank to lend out the excess but in some country, the central bank also forces the bank not to pay out a dividend. What's the implication of this?
Typically a dividend freeze is required when a bank takes a bailout. Negative rates that force a bank to lend is not a bailout - you could say it is the banks being forced to bail out the economy.
I hear a lot about TINA (There is No Alternative) when rationalizing the current valuation of equities, but by using that aren't you assuming equity returns will be positive? If equity returns are negative over 5 years, the 0.0% return in cash sounds like a great alternative. I'm not saying I disagree, I just think that saying equities will definitely be positive is a big assumption. I just feel like I'm missing something here. Yes, equities typically offer a positive return, but that doesn't mean they have to. Thoughts?
Its not about the retail trade, it about large institutional investors that must have an equity allocation and must be long only, its about return-target mandates that must accept more risk. Besides, i don't think a single analyst is forecasting negative equity returns for 5 years. Has never happened in the US market, not even in the GD.
All I am sure about is there was an increase in sales for home safes. Why is anybody's guess. However, it did coincide with a belief that bank deposit rates might go negative.
Hay Mark, regard to the shark example, how would you able to see the move of the shark, and where the big money are going? I remember there is one episode you explain file 13-K in SEC filings, I am not sure if that is what you mean, as It will probably be hard to check for each company to trace the big move of the shark. Thanks!
It's easy to see right now - large cap equities. I am not talking about whale watching - I am talking about the institutions. As L3 demonstrates, institutional money (Pension funds, Endowments, Foundations, Sovereign Wealth Funds) will have a meaningful allocation to equities. Any drop in bond allocations will be met with large cap equity.
Mark it looked like institutional money moved towards cash in April as retail went to equity from what I saw. So isn't that a broken signal too in blind markets like these?
Hello Mark, Could you please explain how introduction of liquidity and large scale asset purchases lowers lending rate (video 24:03)? Thank you for all of your content in youtube and your site! Great video!
It drives down the yield curve at all maturities. That also drives down Libor since it is based on a spread above the spot rates. Many loans are based on Libor + a spread.
@@MarkMeldrum Thank you for the answer! I would like to raise just one point for your confirmation regarding the same. For instance in my country, most of lending is EURIBOR + spread. However, banks do not lend by negative rate plus spread. They use max(euribor, 0) + spread. Thus, negative rates are not really felt by customers. Could it mean that the grapth on 24:03 would be more steep?
Considering global inflation & fees, we all receive less currency from our banks than we deposit. Gold/ silver can't go negative but all gov't currency does through inflation. Monero's a strong currency.
The discount rate is the cost of equity. That is fairly constant, even with negative rates, the ERP increases. So using the same cost of equity is the appropriate course of action. You may want to think about g however. Maybe you want to keep it at a long term real GDP growth rate, or subjectively lower it.
Would be interested to see a technical explanation of how negative interest rates would affect currency values. If there are any formulas in the CFA curriculum that would help explain, I'd be particularly interested in seeing that. Thanks.
Thanks Mark. Having said that, would you agree that the real estate market (eg. in Toronto, Vancouver) would continue to go up. The expected high unemployment rate and recession are not enough to push down the real estate market. It looks like stagflation to me.
No idea about those markets - listing are down, and so are sales, so as long as they both move together, should Ne minimal price effect. I am seeing the high end come down however.
@@MarkMeldrum I am in between. I am not really a fan of managing for clients but I would love to manage assets earning a living from that working on my own. Problem is I don't have large enough investment.
I don't see the USD losing that status. However, that does not mean it has to have a strong dollar policy. I really don't see the fx-rate being used as stimulus however, I do think there will be a move to onshore production after this China event which may help the trade balance on its own. Let's not paper over the fact that it was very lax health and safety standards that allowed this to begin in the first place. In a global world, where country to country population mobility is high, the highest health standard countries do have a say in how other countries conduct themselves. I see this becoming a huge issue once we start putting things back together. Either China will have to raise its health and safety standards, or I can see where mobility from China into other countries will be severely restricted.
Hey Dr mark, where does gold fit into this negative rate environment ? Since gold doesn’t pay and in this situation even T-bills won’t pay you anything, so using your toothpaste analogy would the money chasing risk free rate transition into gold ?
Fantastic content. Very interesting to listen to. Will probably have to listen to this a few times for it to truly sink in.
instaBlaster...
This is the most lucid explanation of this topic I've seen, thanks for the great content.
The intro 😂 so true tho
You are the best. Way better than the economists and acclaimed investors ranting over TH-cam regarding -ve interest rates and debt.👍
An outstanding Educational Video. Prof. Meldrum explained most complicated topic in an easy to understand manner.
Mark Meldrum, you sir are fantastic at explaining concepts. "Swim under the sharks." Great advice.
Wow! Fantastic high quality educative piece on such a complex subject.
You sir are a gift to people like me who can only hope to learn from you. I'm only CFA level I qualified so my knowledge about this is not enough to completely understand everything you taught but I was able to learn a lot from this.
Thank you Sir
You have closed all the gaps i had with negative interest rates. Thank you Mark. Much appreciated.
Best intro about negative rate so far!
Thanks Mark for providing us this content for free.
Awesome content. Just listening to Mark opens several idea that i could share to my government for post pandemic measures.
As always, amazing content. No one conveys the complex with the rigor and clarity that you do, Mark - thanks for all your work!
The explanation on retail consumers action during negative interest rates really hit hard.
Dr. Meldrum,
How specifically does the central bank implement negative interest rates? Like how does it work mechanically?
The CB sets a target rate then lends and borrows at the bank and overnight rate, which are 25 bps above and below the target. It is the open market activity that targets the rate.
@@MarkMeldrum Hi Prof Deldrum, recently found your channel and just had to subscribe for the amazing content. I wanted to ask what you meant at 5:35-5:39 where you said that banks were "exempted" from Switzerland's negative rates. Given the mechanism for implementing negative rates being the bank and overnight rate, how would such an exemption work?
Hello Dr Mark,
Thoroughly explained much appreciated. I have three questions.
1) Since lower rates has positive wealth effect on people in western world where most of the people own assets that appreciate with lowering interest rates like equity, bond, house etc. so shouldn't consumption increase. Unlike in Asian country, where lower interest rate has lowering wealth effect where most people invest in interest bearing assets.
2) What your take on the effects of AI and machine learning on investing profession.
3) whats your take on dollar. If there will be negative interest rates. Will it affect the willingness of other central banks to hold dollar in their reserves beyond the trade requirement. especially when US treasury department is quick to label countries as currency manipulator, if they try to keep their currencies undervalued
Thanks
1. for a wealth effect to have real effect, you actually have to wait for those assets to deliver a wealth effect. Since the downturn, neither housing or equity prices have hit new highs.
2. No take on it - it is what it is.
3. Another CB holding USD won't have a negative rate unless they are in a negative yielding asset. Currencies are almost impossible to forecast. Any forecast is just a guess, and it has a 50% probability of being right.
@@MarkMeldrum Thanks for your quick response.
Excellent work as always, earned my charter several years ago (with help from your courses) and find your content very useful for continuing education - keep up the good work!
Love that new intro
I'll have to watch this a couple more times
Thank you so much for explaining this, I finally understand what's the purpose of negative interest rates. Really appreciate it.
Thank you for the comprehensive overview, especially other countries' and industries' experiences
Thanks so much for posting this. Very helpful in thinking about the negative rate question.
Mark, thank you. Excellent video with good flow! Thanks for putting this together.
For me, there is one unexplored area which relates to capital adeuqacy and liquidity ratio as prescribed by the Basel accords. I will be watching this closely if and when negative rates are implemented in the U.S. and/or the U.K.
- Regarding your final comments: Do you think valuation will turn from relative to absolute when interest rates go back up (if that ever happens) or some other trigger?
- Totally agree with companies not taking credit now due to abysmal current demand. But based on that logic, if demand does start increasing again, wouldn't the large amount of credit available stimulate a equally impressive comeback? Is that the so called V shaped recovery everybody keeps talking about?
- There's something that feels wrong about piling onto equities based on the primary argument that there's nowhere else to go, despite knowing that fundamentally valuations doesn't make sense. Heck by that logic, I can see a strong argument about going into high beta stocks since everyone is piling into equities.
- I feel that with the transition to relative valuation, risk is also being looked at more from a relative perspective now. And that's a scary thought personally. I can see heightened volatility sustaining moving forward because of that, which would counter the historical trend.
-Swim under the sharks, haha I'm adding that to my investment tenets.
Awesome job Doctor, you just gave many perspectives and very logically make connections between what I'm studying specially in CFA program to real life economics. As a newbie in finance you motivate to be even keen at observing and analysing the state of economy.
Your content is so valuable. Thank you very much and best regards from Germany
Why would the highest rated companies see a drop in lending rates? Thanks for the video. Loved the shark analogy.
Competition. If wholesale borrowing costs are coming down, then you have to give your best a tribute or they will be someone else's best.
Thank you, Sir, I would not mind having a longer video, great content as always :)
Fantastic episode! Just a quick one - from a theoretical point of view, I agree with absolutely everything, from a practical vantage and specifically looking at Europe and the implications that has had/ is having on their economies, do you believe negative rates in the US sounds the alarm that there would have to be a sort of secular stagnation environment going on that forces the Fed to go negative? In that environment, do earnings declines offset the increase in payout and yield generated. Also, do you think the convenience yield of cash and doing business in cash renders neg rates obsolete?
Thanks and firmly swimming under the sharks!!!
If the US uses negative rates for stimulus, then yes that could signal that conventional monetary policy has reached it limits. I would expect the Fed to give a lot of lee-way to fiscal policy first. If monetary policy is impudent at the zero bound, fiscal policy could take over. But that relies on a bunch of loser do-nothings to suddenly become smart and do the right thing. We do not elect qualified people to office, we elect popular people. So maybe the Fed will have to do ALL the heavy lifting.
In that case, you could forecast possible deflation - which is NOT as bad a thing as theory suggests (both rounds of deflation in US history were con-current with above average economic growth and stock market rallies). I do not see stagnation for the US - I see adaptation and innovation. You cannot use deterministic linear forecasts for strategic actors. You have to move from economic models to game theoretic outcomes.
Dr Meldrum - what would think is the right thing to do fiscal policy wise? And has your view on fiscal policy been changed by the pandemic at all?
thanks mark for another great video! Appreciate your willingness to share your knowledge, thoughts, and opinions.
Love this video and the precise content and delivery of the concepts. Koodus ~
@Mark, thanks for the fantastic video! What happens to the repo rates and mortgage lending rates in a -ve interest rate environment? Any insights on that one?
For mortgages, it depends on how the rate is set. In Denmark, mortgage rates were set in capital markets, so it was possible for short term mortgages in that country to experience negative rates even after fees since negative rates didi flow through to capital markets. In the US, banks set the mortgage rate, which is often pegged to the 10-year rate. Under an originate and sell model, I am not sure negative rates would work since much of the system is simply not setup for reverse interest payments. The infrastructure would probably offer a lot of resistance to negative rates. As for repo rates, not sure there. I believe they have gone negative in countries that have used negative interest rates. Maybe an institutional investor can confirm that for me.
Love the metaphor in the end-Swim under the belly of the shark HA! Enjoyed watching the video! Thanks
excellent review, thanks from switzerland.
Hi Mark,
Literally viewed this as soon as you uploaded. Thanks for making this video.
Question/corollary: I think that it would actually tie in really well to both the Level I and Level II curriculum if you could talk a bit out *what negative interest rates could/would do to the current global reserve currency, in today's case the US Dollar* (I know it's a hot topic but I do *NOT* mean to tinge it with any political tint. I mean just looking at it secularly.)
A deflation event is coming due to the depression caused by the Coronavirus pandemic. The Fed lowered interest rates to zero to facilitate government indebtedness. However in a deflationary regime, real rates go steeply positive, making now all-time-high debts (not only in absolute but in relative terms i.e. %-age of GDP) even more burdensome to service, which was exactly the opposite of the Fed's intent. One may think that a quick solution to this is "just print more money," however there is over $12 trillion eurodollar (simply defined as US dollars held outside the US banking system) debt, and those folks cannot print their way out. Deflation would logically shrink the monetary supply just as the entire world has more USD demand than ever - and over $1.8 trillion of that USD-denominated debt ex-US matures in the next 12 months.
The only solution is for the Fed to therefore take nominal rates below zero, in order to keep the real rate at zero.
What are your thoughts on this? Both the odds you put on this happening and the ramifications thereof? I think it's a fascinating (and somewhat terrifying) proposition. Would love to hear your thoughts.
Thanks!
Thanks Dr. Mark.
What is your view on holding gold? I see there is a trend of countries accumulating gold recently and it probably happens to financial market soon. Also gold stocks seem like a great choice since they are hiking their dividend
You are an incredible educator Mark. I really admire that but one thing as u are right that equities dividends are the best destination relative to elsewhere , would that be applicable to all markets or countries?, or could there be other heavens which the flow of cash can drain to?
Great Video. Thank you
Great video Mark, thank you. I highly recommend Richard Koo’s books on balance sheet recessions on the point of low credit demand after this kind of shock. Also, a very interesting documentary is “Princes of the Yen”, can be found here on TH-cam.
A little warning on Princes of the Yen, the first 30 minutes can seem a little offensive if not seen in the context of history.
@@MarkMeldrum Hi Mark, What the context of history in short
Mostly WW2. It got kind of ugly between China and Japan.
@@MarkMeldrum Thanks Mark!
will corporations still remain profitable? will they be able to post returns and dividends?
There's always unintended consequences within a complex system.
Fantastic video. I just didn´t get how the curve on banks spread flattens. could you give us more detail on that? Thanks!!
The bank's curve is the treasury spot curve. From that they add spreads for credit risk. On a flat curve, there is little spread between what they can borrow for on the short end and lend out at on the long end. That gets even worse for floating rate loans.
as I said before ......I will pay big bucks for more content like this.
Thanks for this awesome content Mark!
An amazing content!. Thank you very much for your great explanation
Thanks for insight. Just thinking if you can expand a bit on the negative rate in relation to the consumer debts given the GDP is pretty much driven by consumer spending which is driven by increasingly debt. If income and productivity is increasing as fast as debt then what will happen eventually? What about zombie companies that can not surivive even a modest interest rate rise.
Great video Dr. Meldrum. I was wondering with everybody being push into riskier assets, doesnt that make emerging markets very attractive? Higher real growth, higher yield on capital (in theory). Although it seems like for the last 2 years, the US has just been sucking all of the capital and emerging markets have underperform. Is it fx related or just that investors were anticipating economic softness (late-cycle, trade-war) and took refuge in the US? Thanks
EM will follow on.
Loved this explanation. Could you dive deeper in another video at some point in time?
are there any details you could link that you decided to keep out of this video?
Level 2 Economics come to mind...
Nice and clear presentation.
Hello professor.
Why will people not buy gold as a store of value?
Also alternative investments like bitcoin, commodities , real estate would potential see more inflows. Please correct me if I am wrong.
My main question being why not look at gold as a store of value for an investor looking at a risk-free return. In India many individuals have always accumulated gold at every possible price to store their wealth, not really looking for growth. Farmers and seasonally artisans have done the same historically.
Kindly correct me if I am wring anywhere. Thanks.
Wondering the same regarding gold!
Gold is in a bull market now, so gold is being purchased. Bitcoin is not. It is really just still a novelty and I don't see that becoming mainstream. As far as AI, they are being purchased. Commodities right now have no real demand, so their price will respond to economic growth, not just a search for yield. They have no yield, only return when demand is there.
@@MarkMeldrum Thanks for the reply.
@@MarkMeldrum Thanks for the reply professor.
Dr. Meldrum I am curious what a couple of your favorite finance publications are for keeping up with current financial events and data. Appreciate everything you do! Thank you!
Barron's, The Economist, Bloomberg, Financial Times, WSJ, The Journal of Finance.
@@MarkMeldrum Thank you!
Low interest rates have been a thing in Taiwan for more than a decade (so central bank can deter the currency from appreciating), and that has cause asset prices (especially real estate) to more than 3x. As a young individual in his early 20s, this has honestly made me quite pessimistic about my future…
I was wondering what your opinion would be regarding the possibility and feasibility of central banks around the world (especially those in low interest rate countries) raising interest rates in the future? Wouldn’t they be wary of doing so because asset prices would fall drastically? And wouldn’t this just lead to a vicious cycle of low interest rates forever?
Best economic video. I learned a lot.
Hi Mark. Thank you for the great content. FYI, the large Danish banks charge negative interest rates on retail savings accounts.
Is it actually called negative interest on the bank statement, or is it called a fee like "Holding Fee"?
@@MarkMeldrum Danske Bank is charging negative rates on cash deposits greater than x amount of DKK. Link: danskebank.dk/en/personal/ratechange
@@MarkMeldrum Negative interest rates. Rates and account thresholds vary. Here is an example from the largest bank. danskebank.dk/en/personal/ratechange
@@gustavmejlvang8682 Havde ikke set dit svar, da jeg svarede direkte i notifikationen :)
Great video Dr. Mark, do you have any thoughts on how macro currency flows will be affected if the U.S. resort to negative rates? Is there any evidence to suggest a specific level of negative interest will deter flows from treasuries, and investors instead accept increased risk in EM for positive nominal rates?
Dr. Meldrum,
Great video, very informative content. One question that I didn't see posed yet, I'm currently studying FI for Level 2 and noted that the interest rate tree is built around an assumption of non-negative interest rates (lognormal binomial tree). Is there any impact on valuation assumptions if we assume that intrest rates do go negative?
No. You would just add them in and follow the math. You would have discount factors > 1 meaning the PV of a cash flow would actually be higher today, not lower. So you may be in a position where you are indifferent between 1.02 toady and $1 a year from now with a -2% interest rate.
Great content Dr Mark!
On a somewhat related matter, it's typically said that when interest rate comes down, bank's profits will be negatively affected. i think in general, most loans are on variable rates with margin sort of fixed against some benchmarks. If that's the case, how can bank's profitability be lowered? is it due to the fact that cheap source of funding which is deposits will be withdrawn and placed at asset classes with higher return? And assuming bank have sizable fixed rate loans, won't the lower interest rate will widen bank's profit? Or is it because when interest rate is lowered, it is with the assumption that economic conditions have worsened more allowances have to be allocated and that lowers the profit?
Thanks in advance! Would appreciate if anyone else can share your views. Thanks!
Great analysis. 👍🏻
Question. If a company had a lot of money but also a lot of debt wouldn't it incentivize those companies to just pay off their debt because they are being penalized for having cash. I can see major companies like apple just paying off all their debts then doing stock by-backs and higher dividends, and companies that have high debt just not paying off their debt because there is no incentive to pay off debt if interest rates are negative. I'm sure there might be reasons that this wouldn't happen like for tax reasons. Furthermore won't a company having less cash make it have higher risk unless it has no debts. Let me know what you think.
Hi Mark - @24.00 how do you mean large scale asset purchase will drag down NIM - by low yielding investments they must make as opposed to lending said money?
Asset purchases will put pressure on long yields, flattening the yield curve.
Hi Dr. Meldrum,
Appreciate your outstanding video! I have a 50/50 SPY/TLT portfolio sitting in my RRSP account for a while. May I ask a quick question.
If the rate gets raised by Fed, I think in the short term TLT will decline, may I ask what would TLT do in the long run? Thank you!
Rates are not going up for a long time.
what is your opinion on the large magnitude of corporate debts which will mature in the coming month? Should we consider the default risk？
Negative rate is good for gold. Some liquidity will be squeezed to Gold and China.
They variable cost the buying a safe theory and pulling our your cash from banks in times of negative rates makes sense to just keep @ the bank.. but if negative rates were to persist, say more than a year like in Japan, wouldn't it make sense for smaller consumers to take out and hoard their cash?
I guess it depends on the magnitude of the negative rates, and the other services that a safe can supply other than just for cash.
What's the best way to follow where the sharks are swimming?
Understanding what institutional investors do. Level 3 CFA will do that for you.
@@MarkMeldrum Great, so I should watch your course videos?
Dr Mark - Interested to know your opinion on what role Bitcoin will play given the extraordinary printing of money and the potential scenario of the USD losing its value ?
Thank you for this. I was eagerly anticipating your views on negative interest rates.
No role - other than a fringe role for the faithful.
Dear Dr Meldrum,
You said that negative rates would not have stimulus effects on real economy, but it would have some effects on asset allocation. As a result, people would keep allocating in equity because it could bring better yield/ return. So, would that be some kind of bubble? Because the real economy is not going to improve how ever the shares are rising?
That is the risk, yes.
Great video!
Insightful, thanks for the video!
I would have loved to hear you on holding/adding some long term US treasuries (like TLT etf) right now in case yields become negative.
Would it be a bad idea to hold those treasuries until either yield rises /stabilizes in negative territories or when equities become "cheaper"?
Hello sir very good content. What are other tools available With central banks if negative int rates do not help stimulate economy. Also in this market we see fiscal stimulus as well as monetary stimulus. How does that affect economy , valuations and asset allocations. Will help if you could add that angle here
Hello professor.
Wouldn't people invest less now?
Jobs are lost, people getting handouts will more likely use it to spend and survive. Wouldn't that lead to lower inflows into assets and more outflows to facilitate basic necessities like food , shelter. Curious to know your take on this
Institutions are by far the biggest money out there. Retail is small. Does not matter what the individual will do, it is what the institution will do. Besides, millions and millions of American invest every two weeks through their pension contributions. That cash flows into manger accounts and then into assets. Every pay cycle, hundreds of millions of dollars flow into bond and equity funds.
@@MarkMeldrum Thanks for the reply professor.
Mark, would you say that in general, the sharks need the market to always go up, because that is where they keep most of their money?
Ferro on Bloomberg ensures he differentiated between Policy Rates/issuance rates vs the Market's current yield on government bonds. Could you provided a brief explanation? Also, will this shift more demand to positive-yielding Investment Grade debt?
What do you think could be the solution to get out of low growth environment. I am assuming that there is low inflation in the economy which is causing a negative interest rate. I believe one of the solutions could be attacking it from the fiscal side rather monetary. Your views ?
Amazing video. Thank you!
What are some resources you would suggest us to use in order to increase our knowledge efficiently on real world issues, enabling us to do analysis such as what you just did? I’m doing my 3rd CFA exam this December, but in order to relate the topics to real world, would you suggest books, academic papers, or news articles? Any particular suggestion on rates and its global effects for the recent years?
Bloomberg, Barron’s, The economist, WSJ, etc. All applied - you will recognize the content as you see and hear it. Conferences are great as well.
I would add 2 things: Start trading and read more annual reports. At least this seems to work better for me than just reading Financial Times or books.
'Swim under the sharks' - Mark Meldrum
The black background is really hard for our eyes to follows the video !!! Hope to change, thanks
23:58 Dr. Meldrum, how does liquidity infusion flatten the yield curve and reduce the lending rate?
I think its because when the central bank buys assets, the price of the assets increase, which means the yield of the assets decrease. If the yield of the asset decreases, that area of the yield curve (decreases) flattens. When central banks buy assets, money is added into the system, when the supply of money in the system increases, the cost of loadable funds decreases...
Excellent presentation, many thanks! What I think is missing however is how government tax policies are going to affect asset allocation in a negative interest rate environment. When (not if!) the government raises corporate and dividend taxes, would there still be enough money left for companies to give back to shareholders? Could in such a case zero yielding investments appear more attractive in terms of risk-reward ratio? I would be very interested in your thoughts on that. Thanks again, your chanel is the best in financial education i've seen so far!
If taxes were raised, the most responsible thing to do would be to weight the capital structure far more in favour of debt. Issue debt at low rates, use that to buy back stock to change the capital structure. The cost of debt drops as tax rates increases. So lower cost of wacc. Europe has much higher tax rates than the US, and as a result companies tend to use a much higher level of debt in their capital structure. Higher taxes raise the risk of insolvency for the next crisis. That means even more bailouts. Push one lever, another pushes back.
@@MarkMeldrum Very grateful for your reply! So it seems we are in a vicious circle. Governments and companies will keep piling up dept at very low rates, while stock prices go to the moon. Doesn't look very sustainable in the long term. But I guess the best play is still to stay in quality stocks and be prepared to get out before some paradigm shift starts - after all even the mightiest shark ends up as food for other fish.
Would the banks benefit when making loans at a negative interest rate if we assume a deflationary environment (which is likely to persist until the loan term) ? That is to say could the real return be positive amidst deflation and negative interest rates while making loans ?
Banks report earnings in nominal numbers.
Thanks Mark. Any suggestions on good papers to read on these topics?
Google Scholar - search for Negative Interest Rates. Quite a few journals offer open PDFs.
@@MarkMeldrum thanks. If anyone's looking for a new podcast "at any rate" by JP Morgan is a good listen. Latest episode on neg rates.
Mark, what about lower valuations in European and Japanese equity markets since negative rates have been introduced? If we buy into the narrative that negative rates would mean (much) higher valuations why aren't we seeing it? Theoretically as rates go lower (and negative) P/E ratios would have to rise to infinity as earnings yields fall towards zero. Emprically, there seems to be a certain floor in earnings yields in Japan and Europe that even rises as rates go negative. I can't seem to square this circle.
Japan's Nikkei has increase from 2011, as with the DAX since the ECB went negative. Rates have dropped in the US continuously for 40 years while the average PE has risen (not to infinity) and equity market prices have increased almost 700%, not counting re-investment.
Population demographics and culture are two biggest factors of economic growth. Once you have a declining population growth there is no way your GDP will grow at the same level as when population was growing a 7%. Then the GDP growth is highly dependent on consumerism culture and manufacturing for demand outside your own country. But looking at current scenario how global trade is getting less and less favoured by those who are in power you need huge demand growth from your own country. That is why small European countries are in trouble and countries like India can thrive.
Dr. Meldrum, from your video we know that Fed might force the bank to lend out the excess but in some country, the central bank also forces the bank not to pay out a dividend. What's the implication of this?
Typically a dividend freeze is required when a bank takes a bailout. Negative rates that force a bank to lend is not a bailout - you could say it is the banks being forced to bail out the economy.
Great explanation
I hear a lot about TINA (There is No Alternative) when rationalizing the current valuation of equities, but by using that aren't you assuming equity returns will be positive? If equity returns are negative over 5 years, the 0.0% return in cash sounds like a great alternative. I'm not saying I disagree, I just think that saying equities will definitely be positive is a big assumption.
I just feel like I'm missing something here. Yes, equities typically offer a positive return, but that doesn't mean they have to. Thoughts?
Its not about the retail trade, it about large institutional investors that must have an equity allocation and must be long only, its about return-target mandates that must accept more risk. Besides, i don't think a single analyst is forecasting negative equity returns for 5 years. Has never happened in the US market, not even in the GD.
Id be looking for a barborous relic paying zero when rates are negative personally... Are u sure those safes in Europe where for paper?
All I am sure about is there was an increase in sales for home safes. Why is anybody's guess. However, it did coincide with a belief that bank deposit rates might go negative.
@@MarkMeldrum would love to get ur take on gold in relation to negative rates. I loved this vid BTW...
Thanks Mark!
Hay Mark, regard to the shark example, how would you able to see the move of the shark, and where the big money are going? I remember there is one episode you explain file 13-K in SEC filings, I am not sure if that is what you mean, as It will probably be hard to check for each company to trace the big move of the shark. Thanks!
It's easy to see right now - large cap equities. I am not talking about whale watching - I am talking about the institutions. As L3 demonstrates, institutional money (Pension funds, Endowments, Foundations, Sovereign Wealth Funds) will have a meaningful allocation to equities. Any drop in bond allocations will be met with large cap equity.
Thanks, If I understand correctly, we would directly check the move of company like vanguard and blackrock?
Mark it looked like institutional money moved towards cash in April as retail went to equity from what I saw. So isn't that a broken signal too in blind markets like these?
Hello Mark,
Could you please explain how introduction of liquidity and large scale asset purchases lowers lending rate (video 24:03)?
Thank you for all of your content in youtube and your site!
Great video!
It drives down the yield curve at all maturities. That also drives down Libor since it is based on a spread above the spot rates. Many loans are based on Libor + a spread.
@@MarkMeldrum Thank you for the answer!
I would like to raise just one point for your confirmation regarding the same. For instance in my country, most of lending is EURIBOR + spread. However, banks do not lend by negative rate plus spread. They use max(euribor, 0) + spread. Thus, negative rates are not really felt by customers. Could it mean that the grapth on 24:03 would be more steep?
Considering global inflation & fees, we all receive less currency from our banks than we deposit. Gold/ silver can't go negative but all gov't currency does through inflation. Monero's a strong currency.
Gold and silver can deliver losses, which is the same as a negative deposit. Buyers of gold at $1900 6 years ago are still not even.
Dr. Meldrum,
How are/would analysts getting discount factors for their equity valuations whilst interest rates are negative?
The discount rate is the cost of equity. That is fairly constant, even with negative rates, the ERP increases. So using the same cost of equity is the appropriate course of action. You may want to think about g however. Maybe you want to keep it at a long term real GDP growth rate, or subjectively lower it.
Would be interested to see a technical explanation of how negative interest rates would affect currency values. If there are any formulas in the CFA curriculum that would help explain, I'd be particularly interested in seeing that.
Thanks.
The International Fischer Effect. Inflation differentials and interest rate differentials.
Thanks Mark. Having said that, would you agree that the real estate market (eg. in Toronto, Vancouver) would continue to go up. The expected high unemployment rate and recession are not enough to push down the real estate market. It looks like stagflation to me.
No idea about those markets - listing are down, and so are sales, so as long as they both move together, should Ne minimal price effect. I am seeing the high end come down however.
Out of curiosity, Mark do you manage funds for other people
That is a solid no.
@@MarkMeldrum I am in between. I am not really a fan of managing for clients but I would love to manage assets earning a living from that working on my own.
Problem is I don't have large enough investment.
My take here , all the proposed solutions right now leads to equity.that is why you should buy some and sleep on it.
Would the USD's status as a reserve currency diminish the already complicated effects that FX rates would have as a stimulus?
I don't see the USD losing that status. However, that does not mean it has to have a strong dollar policy. I really don't see the fx-rate being used as stimulus however, I do think there will be a move to onshore production after this China event which may help the trade balance on its own. Let's not paper over the fact that it was very lax health and safety standards that allowed this to begin in the first place. In a global world, where country to country population mobility is high, the highest health standard countries do have a say in how other countries conduct themselves. I see this becoming a huge issue once we start putting things back together. Either China will have to raise its health and safety standards, or I can see where mobility from China into other countries will be severely restricted.
Hey Dr mark, where does gold fit into this negative rate environment ? Since gold doesn’t pay and in this situation even T-bills won’t pay you anything, so using your toothpaste analogy would the money chasing risk free rate transition into gold ?
It might. I just don't see the shine on gold however, so I have never really spent a lot of time on it. Gold is in a bull market however.