He said one of the big ones he made was in times of frothy capital markets when all your competitors are well capitalized, its was a mistake to be frugal and not take as much investors money as they could.
We are currently in a time of very frothy capital markets. Money is just being given away. This is going to lead to, if it hasn't already, a big jump in the gap between the rich and the poor.
These lower interest rates are allowing hedge funds to make money via currency carry trades (http://www.investopedia.com/terms/c/currencycarrytrade.asp) while the average person is unlikely to be able to take advantage of this situation, if anything it make sit harder for the average person to save for retirement due to the paltry interest rates that are being paid on the products available to them.
I don't know what the solution to this is.
I guess if there is any good news in this, its that every single government who matters has already forced their bansk to go through some pretty strenuous stress tests wrt negative interest rates and there hasn't really been alot of bad news to come out of Europe, Canada or the US.....yet
To add to this, the trend in corporate America today is to reduce capital on balance sheets. Hoarding cash or assets that can be borrowed against is considered very passe, and many CEOs have been either fired or forced to do stock buybacks by activist investors for not deploying capital or returning it to investors. That is, they're being encouraged to withdraw investments at a time when it's easiest to get investment.
It will be interesting to see what happens when companies that are reliant on capital markets encounter both a draw down in income and vanishing liquidity for their need to borrow (and hint, these things are highly correlated with recessions).
To start with Google and Facebook don't feel any pressure to do any of this. Their founders have complete control of the company, and they do not have to listen to anyone.
That article is a little misleading because it does not net cash holdings with liabilities. The notion of "holding cash" is a ridiculously misleading concept. For example, Apple does have a lot of cash and cash equivalents: roughly $250bn worth. But they also have a lot of debt. $165bn of debt according to their latest filing[1]. And what's more, Apple holds this cash offshore, and borrow money domestically. So, they use the money they borrow to buy back their stock and pay dividends, but leave their cash offshore, with the hopes of one day getting a tax holiday that would allow that money to come back to the US tax free to pay back the aforementioned debt.
Even still Apple is a cash-heavy company, but that same narrative is playing out in every business that has an international presence. They accumulate "cash" overseas, borrow against it domestically to do stock buybacks, and then the NYT can write misleading articles.
Corporations have to hoard that cash, they've taken on record amounts of debt obligations. If they discharge that cash or otherwise spend it, their balance sheets start to violate debt covenants. The very large stock buyback binge that has been going on courtesy of the Fed's low rates, has been paid for via a lot of debt.
I said that the large spread between the dollar and Yen benefits hedge funds. And I also said that low interest rates makes it harder for the average person to save.
I stand by both those comments. I don't think you need to be rude or to try and twist my words, just to try and refute a point no one was making;)
The rate difference only benefits hedge funds if USDJPY also plays along. That trade has fx risk and you're making it sound like a sure thing. If USDJPY goes the wrong way, the trade loses money and the average joe whose savings account is roughly flat looks pretty smart (in relative terms).
Normal people aren't structurally important parts of the economy.
Not that I think it's clear that hedge funds and big banks are structurally necessary, but they've managed to create a system where they are considered important by all the people that matter.
Low interest rates reduce borrowing cost. While it's debatable whether that's a wealth transfer, if it is, the transfer is from holders of capital (generally, though not always, lenders) to borrowers.
The negative rates are only on central bank deposits. Loans within the finance industry are usually collateralised as well; if you had $1m of collateral you'd find it a lot easier to borrow another million.
In order for anyone who has money in the bank to pull out money, they must still see a positive IRR, compared to leaving money in the bank. If they don't the central banks eat that money. So yeah it's a wealth transfer from private money to central bankers. Or else the government should ask for the difference for its own coffers and reinvest that into the economy.
How it is a wealth transfer? Is there some fundamental right to risk free interest?
Banks provide a service and those services cost money. If the value to the bank of your money is less than it costs to provide those services than you need to make up the difference. No one is being "screwed".
The way it actually works is that if the value of a bank to society is less than the profit the bank wishes to make, even after making stupid and bad business choices, taxpayers need to make up the difference.
>These lower interest rates are allowing hedge funds to make money via currency carry trades
What does the absolute level of interest rates have to do with being able to perform a carry trade? It's the spread that matters, and that spread exists whether average rates are high or low, on average, across economies.
He said one of the big ones he made was in times of frothy capital markets when all your competitors are well capitalized, its was a mistake to be frugal and not take as much investors money as they could.
We are currently in a time of very frothy capital markets. Money is just being given away. This is going to lead to, if it hasn't already, a big jump in the gap between the rich and the poor.
These lower interest rates are allowing hedge funds to make money via currency carry trades (http://www.investopedia.com/terms/c/currencycarrytrade.asp) while the average person is unlikely to be able to take advantage of this situation, if anything it make sit harder for the average person to save for retirement due to the paltry interest rates that are being paid on the products available to them.
I don't know what the solution to this is.
I guess if there is any good news in this, its that every single government who matters has already forced their bansk to go through some pretty strenuous stress tests wrt negative interest rates and there hasn't really been alot of bad news to come out of Europe, Canada or the US.....yet