Why Lowest Interest Rates in 5,000 Years are Worrisome, Even for Stock Market
Why Lowest Interest Rates in 5,000 Years are Worrisome. The chart below from Bank of America Merrill Lynch contends interest rates are at their lowest going all the way back to 3,000 B.C. at the time of the pharaohs of the first dynasty of Egypt. Is that right? We do know for certain interest rates are the lowest in modern history. The reason is a combination of quantitative easing, zero and negative interest-rate policies.
Why is this so worrisome? Today’s capital system was not created for zero interest rates. Pension funds and insurance companies, for instance, generally base future payouts on actual assumptions of 5% to 8% annual gains. Investments in fixed income instruments compose the largest part of those assumptions. As company pension funds begin missing their actuarial targets, they will be forced to dip into corporate earnings to fund the difference in order to pay their retirees. And that means lower earnings and lower stock prices, That’s contrary to the general assumption that low interest rates often lead to a migration by investors to stocks, and therefore, higher stock prices.