Europe, the ECB, and the Interest Rate Flat-Liner

Category : Blog Client Newsletter Pension on September 4, 2014

interest ratesDespite the increasing specter of higher interest rates in the U.S. next year, it may actually turn out to be a case of “lower for still a little bit longer”. One material driver for that outcome would be Europe. The European Central Bank (ECB) looks like it’s about to start quantitative easing, just as the U.S. Fed is about to stop. That may have a couple of interest rate counter-force effects in the U.S. Firstly, it sets a generally lower tone for global bond market yields. Second, it comes in recognition of Europe’s deteriorating economic position and the ever increasing menace of deflation. The latter has serious ramifications for global growth, and in turn may hold Yellen back, despite continuing signs of recovery in the U.S.

That extends the pain for income investors, who were already bracing for more pain on the road to more meaningful yields – yields that might go some way in meeting their cost of living. In the meantime, total return investing lives on as “flat-liner” return, low risk bonds must be paired with “moving and shaking” risky stocks. Retired investors need to think like the endowment portfolio. Shoot for an average 8% annual total return and plan on shaving an annual 5% off the top for operating expenses. That is, however, asking a lot of the already arguably over-valued equity market. Perhaps it’s time to go beyond thinking like the endowments, and start actually investing like them. That means further diversification into more unconventional markets and liquid alternative investments.

 

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