You're apparently not familiar with the Austrian Business Cycle Theory. It is a full fledged (verbal) economical theory that explains exactly the phenomenon you are describing. It was developed by Ludwig von Mises, and the Mises Institute has excellent videos on YouTube.
KKR may be biased as they are a huge private equity company. It seems quite coincidental that private equity has the highest return on their chart... Their cost of equity must be really high since they are using a lot of debt. https://assetbrief.com/resources/wacc-calculator-9xr5y8r
Actually looking at the paper, they predict S&P 500 CAGR at 5.4% for the 5 years starting as of publication (2018.10.23). From that day to today (2020.06.03), the S&P has gained 15.6%, which is about 9% CAGR -- and that's despite the Covid selloff, which was certainly not foreseen. Now we're less than 2 years into his 5-year forecast period, and timing the market is a fool's errand, and etc. etc. But still, it does kind of lend credence to the thesis that "nobody knows anything."
An allocator who bet on a 5.4% return for S&P over the last two years would be clearly underperforming today.
"If we're just looking at U.S. treasuries, the longer the maturity, the more yield you should get because there's more time that the U.S. government could default"
Nobody thinks the US will default, but the longer-term bonds pay based on inflation expectations over the time period.
Interesting, because I have started to see positive interest rates as the root of all evil (thanks largely to Sacred Economics, by Charles Eistenstein, which had a big impact on me). You say "Cutting interest rates spurs demand and risk-taking."... but from a sustainability perspective (reconciling an economic system that demands endless growth with life on a finite planet), cutting interest rates also enables projects like running a botanical garden or a recycling center or anything that recoups operating expenses but doesn't continuously make more money.
Fair point, here. A unifying position between these two would that lower interest rates make money less expensive, and therefore more useful if you are doing a thing that the economy does not remunerate very well (like a recycling plant), but also less risky, since you don't have to pay as high a price to borrow money today, hence demand and more risk-taking. A solution to get more socially/environmentally valuable projects even with higher interest rates would be to have market interventions that incorporate that value into the market prices of those things so that the market remunerates them more appropriately.
I'm a bit late to the discussion, but low interest rates, by encouraging more consumption, in fact, are less compatible with a finite planet. They cause overproduction, bubbles, resource misallocation, etc., all contrary to an effective usage of resources. So, ZIRP is what forces all economic agents to seek infinite growth, and not positive interest rates, which force a realistic appraisal of resources and their allocation.
Important perspective! Except that it shouldn't be the case: if we want more botanic gardens and recycling stations we shouldn't be lowering interest rates, we should be paying enough (individually or collectively) to make them profitable. Central banks can't tax or subsidize, governments should.
Interesting that crypto wasn't mentioned in this piece. The bitcoin whitepaper came out during the financial crisis, and the price of crypto assets have inflated over the exact same time period as record low interest rates & correspondingly high run-up in asset prices.
Low or zero interest rates lower the discount margin used for investments. Often this is seen as the cost of capital under CAPM modelling. This increases the Net Present Value. SV companies with no profits can use this to inflate valuations under DCF analysis
Intriguing point about looking at money as a living organism.
I may be missing something but how did ZIRP lead to "So all these dollar-organisms all start swimming towards riskier waters". Wouldn't that happen in non zero interest rate environments too?
Think about it in 3D(micro->macro levels) instead of just micro level. The exponential nature of the differing sizes of the "biological players" is where many of the mysteries lay. A large bioP dropping "crumbs" of capital looks like a huge deal to under layers and even disrupting to lower under layers.
It's a nice theory, but the inconvenient fact it ignores is that the Fed was raising US interest rates for three years between December 2015 and December 2018, a period that coincided with rising venture capital financing (reaching a record in 2018 actually). Let's take the US Treasury 3M rate, which the author cited at the beginning of the article, well it was trading above 2% for a whole year from August 2018, so not quite "zero".
A theory about how zero (or near-zero) interest rates were causing more and more money to slosh around the world must also be able to explain why rising interest rates did not do the opposite. I appreciate that the world is extremely complicated with many moving parts, thus any simplistic theory that tries to explain everything needs a high hurdle, in my opinion.
Aren't the largeest proportion of Uber rides to/from public transportation? Uber made public transportation more feasible for more people, because you can Uber to the public transportation, which then takes over the longest segment.
Would you be happy to expand further what you mean by "This entire piece is about how rate cuts spur demand, which has been shown to work exactly as it should over the past decade"
In 2006, I went with my sister to China to adopt her 4th child. On the way out of the country, as we went through security, I was stopped as the person checking passports noticed something weird about mine. He called his supervisor, who called his supervisor and, I kid you not, that guy called over the uniformed military officer with a machine gun. I spoke no Mandarin; they spoke no English. After a few minutes, they let me pass. Turns out, when I was in France a few weeks prior, the immigration officer their had put their visa stamp over top of the Chinese visa sticker. I was more scared, and more mad, than I had ever been in my life. Made it out though.
Just a little comment about the mold animation, i can't help but think that while the mold found the path to food (and i'm not sure how), it actually took the longest possible path to get there…
You're apparently not familiar with the Austrian Business Cycle Theory. It is a full fledged (verbal) economical theory that explains exactly the phenomenon you are describing. It was developed by Ludwig von Mises, and the Mises Institute has excellent videos on YouTube.
KKR may be biased as they are a huge private equity company. It seems quite coincidental that private equity has the highest return on their chart... Their cost of equity must be really high since they are using a lot of debt. https://assetbrief.com/resources/wacc-calculator-9xr5y8r
Also that paper was written in 2018, so it is kind of out of date as well.
Actually looking at the paper, they predict S&P 500 CAGR at 5.4% for the 5 years starting as of publication (2018.10.23). From that day to today (2020.06.03), the S&P has gained 15.6%, which is about 9% CAGR -- and that's despite the Covid selloff, which was certainly not foreseen. Now we're less than 2 years into his 5-year forecast period, and timing the market is a fool's errand, and etc. etc. But still, it does kind of lend credence to the thesis that "nobody knows anything."
An allocator who bet on a 5.4% return for S&P over the last two years would be clearly underperforming today.
"If we're just looking at U.S. treasuries, the longer the maturity, the more yield you should get because there's more time that the U.S. government could default"
Nobody thinks the US will default, but the longer-term bonds pay based on inflation expectations over the time period.
Interesting, because I have started to see positive interest rates as the root of all evil (thanks largely to Sacred Economics, by Charles Eistenstein, which had a big impact on me). You say "Cutting interest rates spurs demand and risk-taking."... but from a sustainability perspective (reconciling an economic system that demands endless growth with life on a finite planet), cutting interest rates also enables projects like running a botanical garden or a recycling center or anything that recoups operating expenses but doesn't continuously make more money.
Fair point, here. A unifying position between these two would that lower interest rates make money less expensive, and therefore more useful if you are doing a thing that the economy does not remunerate very well (like a recycling plant), but also less risky, since you don't have to pay as high a price to borrow money today, hence demand and more risk-taking. A solution to get more socially/environmentally valuable projects even with higher interest rates would be to have market interventions that incorporate that value into the market prices of those things so that the market remunerates them more appropriately.
I'm a bit late to the discussion, but low interest rates, by encouraging more consumption, in fact, are less compatible with a finite planet. They cause overproduction, bubbles, resource misallocation, etc., all contrary to an effective usage of resources. So, ZIRP is what forces all economic agents to seek infinite growth, and not positive interest rates, which force a realistic appraisal of resources and their allocation.
Important perspective! Except that it shouldn't be the case: if we want more botanic gardens and recycling stations we shouldn't be lowering interest rates, we should be paying enough (individually or collectively) to make them profitable. Central banks can't tax or subsidize, governments should.
The problem with interest and the associated mandate to always make money though is the fundamental question of where that money comes from. I wrote a blog post about this that could help illuminate https://medium.com/aint-nobody-got-time-for-that/sacred-economics-8a38f1603b86 , would welcome any thoughts
Interesting that crypto wasn't mentioned in this piece. The bitcoin whitepaper came out during the financial crisis, and the price of crypto assets have inflated over the exact same time period as record low interest rates & correspondingly high run-up in asset prices.
Low or zero interest rates lower the discount margin used for investments. Often this is seen as the cost of capital under CAPM modelling. This increases the Net Present Value. SV companies with no profits can use this to inflate valuations under DCF analysis
Intriguing point about looking at money as a living organism.
I may be missing something but how did ZIRP lead to "So all these dollar-organisms all start swimming towards riskier waters". Wouldn't that happen in non zero interest rate environments too?
It's worth reading Makers and Takers which describes ZIRP and more, wrt financialization. And, Temp! by Louis Hyman.
I'd love to see an article about how the monetary policy implemented in http://freico.in/ might improve some of the outcomes on this..
Think about it in 3D(micro->macro levels) instead of just micro level. The exponential nature of the differing sizes of the "biological players" is where many of the mysteries lay. A large bioP dropping "crumbs" of capital looks like a huge deal to under layers and even disrupting to lower under layers.
It's a nice theory, but the inconvenient fact it ignores is that the Fed was raising US interest rates for three years between December 2015 and December 2018, a period that coincided with rising venture capital financing (reaching a record in 2018 actually). Let's take the US Treasury 3M rate, which the author cited at the beginning of the article, well it was trading above 2% for a whole year from August 2018, so not quite "zero".
A theory about how zero (or near-zero) interest rates were causing more and more money to slosh around the world must also be able to explain why rising interest rates did not do the opposite. I appreciate that the world is extremely complicated with many moving parts, thus any simplistic theory that tries to explain everything needs a high hurdle, in my opinion.
One easy theory is that a large portion of the rest of the world still had zero interest rates and had just seen the power of venture capital
Aren't the largeest proportion of Uber rides to/from public transportation? Uber made public transportation more feasible for more people, because you can Uber to the public transportation, which then takes over the longest segment.
Would you be happy to expand further what you mean by "This entire piece is about how rate cuts spur demand, which has been shown to work exactly as it should over the past decade"
Need link here to share article to FB... :)
In 2006, I went with my sister to China to adopt her 4th child. On the way out of the country, as we went through security, I was stopped as the person checking passports noticed something weird about mine. He called his supervisor, who called his supervisor and, I kid you not, that guy called over the uniformed military officer with a machine gun. I spoke no Mandarin; they spoke no English. After a few minutes, they let me pass. Turns out, when I was in France a few weeks prior, the immigration officer their had put their visa stamp over top of the Chinese visa sticker. I was more scared, and more mad, than I had ever been in my life. Made it out though.
Just a little comment about the mold animation, i can't help but think that while the mold found the path to food (and i'm not sure how), it actually took the longest possible path to get there…