4 ms·

The question is, who cares about interest rates? People invest in stocks. And return on stocks in the last 20-30 years wasn't worse than historical average, and

The question is, who cares about interest rates? People invest in stocks. And return on stocks in the last 20-30 years wasn't worse than historical average, and considering very low inflation in this period, it was quite a bit above average. And certainly the uber rich don't keep money on savings accounts - it's too risky (almost all money would be above FDIC threshold) and they can easily afford volatility of stock market as their planning horizon is near infinite - longer than human lifetime, and at that horizon, stocks are a lot more stable than bank deposits.

teekert 5y ago
"People invest in stocks"... Do you have any numbers on that? In my circles hardly anyone has stocks, some people with money to spare of with a financial background. In general people don't buy stocks, in my opinion.
- anovikov 5y ago
  How do they save for retirement then? Certainly you can't do it with any fixed interest instruments - they are all below inflation or about at inflation at best. Total value of U.S. stock market is $95T+$46T for bond market, of housing, $33T and commercial real estate, $17T. That reflects the breakdown of "where people invest". Because bonds make no sense by themselves and are only needed for rebalancing of stocks, 74% of investment goes into 'stock market'.
  - Workaccount2 5y ago
    >How do they save for retirement then? This is borderline "Let them eat cake"...
  - teekert 5y ago
    Hmm, in the Netherlands we have pension funds and the AOW (general elderly law) both provide people with income. In general, if you have a job, you are saving for you pension. And the pension funds? They invest ;)
JumpCrisscross 5y ago
> who cares about interest rates? People invest in stocks The return on equities is coupled to rates. When rates are low, ceteris paribus, the earnings yield on stocks will be low. Put another way, lower rates drive higher P/E ratios; higher P/E ratios, ceteris paribus, tend to predict lower future returns.
nemo44x 5y ago
You need to examine how stocks return though. Because interest rates are so low today the dividend yield of the S&P500 is about 1.28%. Since the late 70's in particular it has been a steady march down as interest rates have declined over that same time. So to your point yes the "return" has been similar in the last 20, 30 years as historical averages but it's coming from asset price inflation rather than income streams. That's an important and notable difference. Investors are willing to bid up the price of stocks to get any kind of return (since the returns of bonds have fallen so much) creating more asset bubbles and volatility. Additionally, what if we can't really take interest rates lower at some point? Yields on the S&P500 will be nearly tiny and asset prices won't be able to climb further as there's nothing left to harvest. I'll grant it's not as simple as I make it out here - companies have employed strategies to buy back stock rather than pay dividends since it's logically a better thing to do in terms of taxes. FWIW, stocks are sort of a bit player in the financial markets. Bonds are king and the main player overall and as their yields have fallen this has been good for businesses in many ways (cheap money to take risks with) but it also means that really risky bonds are not yielding much for the level of risk they are associated with.
- bluecalm 5y ago
  Dividends don't matter. If anything it makes sense to look at profits or better yet profits before investments in future profitable projects. With that in mind it's still 3-4% at least on average for S&P500 companies.
  - nemo44x 5y ago
    Yes profitability is the bigger picture - companies can choose to distribute that as a dividend, stock buyback, or reinvest. My point being that stocks as a form of income (the entire point of an investment) has all but vanished and the yield has been driven down because of interest rate drops. Investors are willing to pay more and more for stocks because of this - where else can you get yield? One only has to look at P/E ratios since 1980 to see this, meaning that companies aren't simply earning more and doing something else with it. Their stock simply costs more as a percentage of their earnings and less of that is being distributed, relying nearly entirely on appreciation alone to hit their 8% average yearly return. And they've been appreciating more quickly than GDP for quite awhile - not every company is growing earnings 8%/year nor can they. > With that in mind it's still 3-4% at least on average for S&P500 companies The current yield is 1.28%, down from 1.58% a year ago. The last time it was 3% was in 2008 (for a few months) and that was only because stock prices fell through the floor driving yields up for a few months. The last time the index yielded at 3% or more consistently was 1991 with yields being around 4% for much of the 1980's. I don't think it's possible to really raise rates at all maybe ever again and I think the evidence of this is the last 40 years. They ebb and flow but they trend down and continue to. If the trend reversed the entire system would collapse at this point with mortgages being destroyed, stocks falling rapidly in price as higher yields are demanded, and anyone holding a bond left with a bag. For this reason I believe we either see rates to continue to fall or stabilize around 0 and pretty much sit there as growth in terms of yield and appreciation more or less stagnate but with assets so inflated they are out of reach of most people while yielding below inflation which is the only driver of "appreciation" but not in real dollars.

teekert 5y ago

"People invest in stocks"... Do you have any numbers on that? In my circles hardly anyone has stocks, some people with money to spare of with a financial background. In general people don't buy stocks, in my opinion.

anovikov 5y ago
How do they save for retirement then? Certainly you can't do it with any fixed interest instruments - they are all below inflation or about at inflation at best. Total value of U.S. stock market is $95T+$46T for bond market, of housing, $33T and commercial real estate, $17T. That reflects the breakdown of "where people invest". Because bonds make no sense by themselves and are only needed for rebalancing of stocks, 74% of investment goes into 'stock market'.
- Workaccount2 5y ago
  >How do they save for retirement then? This is borderline "Let them eat cake"...
- teekert 5y ago
  Hmm, in the Netherlands we have pension funds and the AOW (general elderly law) both provide people with income. In general, if you have a job, you are saving for you pension. And the pension funds? They invest ;)

JumpCrisscross 5y ago

> who cares about interest rates? People invest in stocks The return on equities is coupled to rates. When rates are low, ceteris paribus, the earnings yield on stocks will be low. Put another way, lower rates drive higher P/E ratios; higher P/E ratios, ceteris paribus, tend to predict lower future returns.

nemo44x 5y ago

You need to examine how stocks return though. Because interest rates are so low today the dividend yield of the S&P500 is about 1.28%. Since the late 70's in particular it has been a steady march down as interest rates have declined over that same time. So to your point yes the "return" has been similar in the last 20, 30 years as historical averages but it's coming from asset price inflation rather than income streams. That's an important and notable difference. Investors are willing to bid up the price of stocks to get any kind of return (since the returns of bonds have fallen so much) creating more asset bubbles and volatility. Additionally, what if we can't really take interest rates lower at some point? Yields on the S&P500 will be nearly tiny and asset prices won't be able to climb further as there's nothing left to harvest. I'll grant it's not as simple as I make it out here - companies have employed strategies to buy back stock rather than pay dividends since it's logically a better thing to do in terms of taxes. FWIW, stocks are sort of a bit player in the financial markets. Bonds are king and the main player overall and as their yields have fallen this has been good for businesses in many ways (cheap money to take risks with) but it also means that really risky bonds are not yielding much for the level of risk they are associated with.

bluecalm 5y ago
Dividends don't matter. If anything it makes sense to look at profits or better yet profits before investments in future profitable projects. With that in mind it's still 3-4% at least on average for S&P500 companies.
- nemo44x 5y ago
  Yes profitability is the bigger picture - companies can choose to distribute that as a dividend, stock buyback, or reinvest. My point being that stocks as a form of income (the entire point of an investment) has all but vanished and the yield has been driven down because of interest rate drops. Investors are willing to pay more and more for stocks because of this - where else can you get yield? One only has to look at P/E ratios since 1980 to see this, meaning that companies aren't simply earning more and doing something else with it. Their stock simply costs more as a percentage of their earnings and less of that is being distributed, relying nearly entirely on appreciation alone to hit their 8% average yearly return. And they've been appreciating more quickly than GDP for quite awhile - not every company is growing earnings 8%/year nor can they. > With that in mind it's still 3-4% at least on average for S&P500 companies The current yield is 1.28%, down from 1.58% a year ago. The last time it was 3% was in 2008 (for a few months) and that was only because stock prices fell through the floor driving yields up for a few months. The last time the index yielded at 3% or more consistently was 1991 with yields being around 4% for much of the 1980's. I don't think it's possible to really raise rates at all maybe ever again and I think the evidence of this is the last 40 years. They ebb and flow but they trend down and continue to. If the trend reversed the entire system would collapse at this point with mortgages being destroyed, stocks falling rapidly in price as higher yields are demanded, and anyone holding a bond left with a bag. For this reason I believe we either see rates to continue to fall or stabilize around 0 and pretty much sit there as growth in terms of yield and appreciation more or less stagnate but with assets so inflated they are out of reach of most people while yielding below inflation which is the only driver of "appreciation" but not in real dollars.