By Bilal Hafeez 13-12-2019

Jim Bianco on Negative Interest Rates, Low Inflation, and Yield Curve Expansion (Macro Musings)

(59 min listen)
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Summary (You can listen to the podcast by clicking here)

Jim Bianco, President of Bianco Research, discusses Fed policy and negative interest rates. $12.5 trillion in negative interest rate assets, all of which originate from continental Europe and Japan leaves the US almost the last bastion of positive rates in the developed world.

• Bianco highlights low inflation and demographic shifts as the two primary drivers behind rates declining, with most inflation figures in the developed world below 2.5%. Developments in information technology are the most likely reason behind the prices staying low year-on-year.

• Lowest cost providers in all parts of the value chain are easy to source and compare online. Dynamics across all industries are changing. For e.g., Vanguard undercutting Fidelity’s fees by just 1bp saw billions of dollars flow their way.

• Boomers are to blame for low rates. In the developed world, there are currently over 300 million people over the age of 65 who are projected to live for another 21 years. Their asset allocations typically veer towards fixed income instruments and especially ones of a high quality, to ensure predictable income streams for years to come. This has exerted extreme downwards pressure on interest rates. (Bullish Rates and Tech)

 

Why does this matter? 

• Conventional wisdom usually points to accommodative central banks as instigators of low rates, but this combination of low inflation with a strong appetite for safe assets has arguably more influence.

• The consumer does appear a winner from low prices due to technological advances. However, educational systems designed for the industrial age are failing to provide the appropriate skillset for participation in a modern economy and is a major cause of global disparity.

Financial stability relies on positive rates; negative interest rates in the US could be a major threat.