A world in low-rates and what it means

The most important powers of a country’s central bank are how they set the short-term interest rate and monetary policy. The U.S. Federal Reserve may initiate a 0.5% rate cut this week and the European Central Bank (ECB) is also launching a significant cut of their own. The ECB is also contemplating the purchase of European equities, similar to Japan’s equity purchase program ^2. This reiteration of the same old market-stimulus programs and aggressive new strategies since the 2008 Financial Crisis, has serious consequences to future central bank powers and their abilities to manage a crisis in the future. This analysis is to describe what’s happening, the outlook for global growth, and what this means for your investments.

Don’t let the bull market in US equities fool you; global growth is slowing. German manufacturing reported the lowest production numbers since the Financial Crisis, trade disputes, and low global employment continues to be a barricade to growth.

Low-interest rates force savers to take additional risks by investing in equities. Cash and bonds are increasingly less likely to earn any profit and some bonds are guaranteed to lose money at maturity; “There’s now about $13t in negative-yielding bonds.”^3 Meanwhile, Europeans and Japanese continue to hide cash under their beds instead of keeping it in the bank due to the negative interest charged on their cash.

U.S. large-company stocks will continue to benefit from record-breaking stock-buybacks, repatriation of cash from overseas, and increasing attractiveness to investors overseas. European stocks may soon be the next bastion of bullishness if the ECB starts a local equity purchase program, which will be the trigger of BlackRock’s next “buy” recommendation for their clients^2.

Investors should remain in U.S. large stocks but be ready for a tactical change, including being ready to add European equities and precious metals. It’s also wise to remain cautious as the current strength in stocks has more to do with monetary influence rather than consumer demand. Meanwhile, European youths who remain unemployed by double-digits have little hope for a real career and limited access to capital to start their own business. Populist governments, seemingly sponsored by Russia, have little interest in developing structural change to promote stability and growth for their own people and the global community.

At Eureka Wealth Management, I report on global, economic developments that can set the tone of my clients’ portfolios for the intermediate-term. I also plan retirement and advise on tax & estate strategies. Call for a free, initial consultation at (760) 537-0791 or online at eurekawealthmanagement.com.

Sources:

^1 FT 7/28/19 “The global economic momentum is slowing”

^2 FT 7/28/19 “ECB purchases of equity would be a dangerous step”

^3 Bloomberg 7/28/19 “The Logic Behind the Bonds that Eat your Money”