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By Bill Acheson

Remember the phrase “lower for longer” that the market used to use to describe the outlook for US interest rates? In a post-Brexit world, “lower forever” seems more appropriate. The continued, and possible permanent, low interest rate environment worldwide holds significant consequences for investors. And also for investment advisors who want to avoid a “Clexit,” that is, a client exit.

Interest Rate Policies and Low Interest Rates

How did we get here? The answer that many people will give to this question is monetary policy – meaning that central banks around the world, through their interest rate policies, are responsible for low interest rates. While this is accurate on the surface, the reasons central banks need to lower interest rates in the first place reveal the true answers:

1) The Great Recession. The great recession is the single largest contributor to continued low interest rates, although by no means the only factor. The collapse in credit associated with the great recession destroyed all kinds of growth: asset prices (think real estate), economic output (think company earnings) and, of course, employment. These outcomes are all very deflationary, and the monetary policy response to deflation is to lower interest rates to stimulate credit and economic growth. Central banks around the world – including the United States – are still fighting deflationary forces unleashed by the great recession.

2) Demographics. One need only look at Japan to see the economic and growth consequences of an aging population. In comparison with its 10 percent real GDP growth rate between 1950 and 1960 and a 4 percent growth rate between 1970 and 1980, Japan has only managed an average growth rate of 1 percent since the early 1990s. This declining trend has been driven by Japan’s considerable demographic challenges. Population aging is a significant demographic issue for Japan and a common feature among developed economies – the United States included. Deflationary to be sure.


3) Globalization and the Democratization of Uncertainty. Uncertainty breeds conservatism and conservatism is, you guessed it, deflationary. Because of the interconnectedness of a globalized world, we have new and seemingly never ending sources of uncertainty. Brexit is one example of a global uncertainty generator, and there are many others. The problem is compounded by the fact that financial markets and people have not yet developed the models and mental frameworks to deal with an increased uncertainty output from around the world.

Implications for Investors

Investors of all types, and their investment advisors, need to sharpen their yield hunting skills. This doesn’t mean piling into the highest yielding bond fund or preferred stock, but rather it requires understanding the fundamentals of yield. What role does yield play versus growth in a portfolio? What is an appropriate expectation? Where can yield be found?