Weekend Reads from India: Interest Rates and Munger’s Take
For buyers, the price would have to be about right if it’s free. Yet, in some developed markets, zero-bound and even negative interest rates have failed to boost investment activity in any significant way. Savers continue to park funds in “savings” accounts with sub-zero interest rates. Perhaps, the inflation target communicated by central bankers is not high enough, as researchers recently suggested?
Achieving stability has been an important goal of central bank policy in the developed economies. But maintaining that stability has come at a cost. These central banks can’t ease interest rates any lower and it’s turning out to be an unwieldy albatross around their necks. Moreover, prolonged easing has side effects that are far from “innocuous.” Ultra-low rates can be detrimental to businesses and individual saving plans and can have a negative influence on other countries.
But a comprehensive awareness of the limits of central bank activity has yet to take hold and calls from policy makers for coordinating central bank actions have yet to be fully heeded. Nevertheless, perhaps QE infinity and Milton Friedman’s radical prescription — helicopter money — will shift from abstract thought experiments to implemented policy actions. Such measures may prove necessary: A McKinsey Global Institute report released this week, provides a detailed analysis of risk premium drivers and makes the case for diminishing returns over the next two decades.
Once again, Berkshire Hathaway’s annual shareholder meeting — dubbed “Woodstock for Capitalists” — has provided the investment community with intelligent and engaging discourse on a wide variety of topics. Charlie Munger’s description of macroeconomic forces as factors that one has to “put up” with is refreshingly apt. Last year, at the Daily Journal annual meeting, Munger had this to say about the state of the world economy: “Anybody who is intelligent who is not confused doesn’t understand the situation very well.” Buffett and Munger’s relentless focus on the micro — customers, business models, management quality, competitive forces, and behavioral vulnerabilities — deserves renewed attention. Of course the drawback of their lucid insights into the workings of the market is that they make investing look disarmingly simple.
Around the world, financial markets do not appear to be deteriorating. Among the major trouble zones of recent months, China has shown signs of stability and the IMF’s April World Economic Outlook report is less critical of the country. But defaults are rising there and some market observers are skeptical of its underlying health.
Turning to the other notable “growth” story — India — the IMF has retained its high economic growth forecast. But there are inevitable risks to India economic expansion, among them, the threat of another drought. It would be a disservice to not draw attention to the unfolding tragedy and ongoing famine-related deaths. Instead of benefiting from a demographic dividend, India may also have to confront a low-income trap. The country’s jobless growth and dependence on agriculture aren’t helping the situation either.
Below is a list of links to interesting articles I have come across in recent weeks. Happy reading and enjoy the weekend.
Wisdom from the Investment World
- “What Tools Does the Fed Have Left? Part 3: Helicopter Money” (Brookings Institution)
- “The Mohamed A. El-Erian Interview: How Bad a Slowdown Do You Need as a Wake-Up Call?” (Business Insider)
- “Real Exchange Rates and European Adjustment” (The New York Times)
- “What’s Wrong with Negative Rates?” (Project Syndicate)
- “Are Millennials Doomed in a Lower Return Environment?” (A Wealth of Common Sense)
- “Hedge Funds: The (Somewhat Tepid) Defense” (AQR Capital)
- “A Victim of Its Own Success” (The Reformed Broker)
- “How Investors Should Deal with the Overwhelming Problem of Understanding the World Economy” (Vitaliy Katsenelson’s Contrarian Edge)
Earth and her surroundings in photos
- “Two New Super Earths Found in Cosmic Backyard” (Discovery)
- “Climate Change Is Moving the North Pole” (National Geographic)
- “10 Winning Images Capture the Beauty of Protected Lands” (National Geographic)
- “Spring 2016 — Best Photos across the World” (MSN.com)
In a Lighter Vein
- “World Cartoonist Day — HT Brings Toons with a Pinch of Satire” (Hindustan Times)
- “It’s a Jungle out There” (The Economic Times)
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
Image credit: iStockphoto.com/JLGutierrez