Why are interest rates so low and are stocks overpriced?

  1. Falling inflation due to central bank policies and disinflation programs in the 1980s and 1990s, further powered by technology and various innovations that have brought operating costs down. Inflation and interest rates are linked in the long run, hence falling inflation has brought down nominal interest rates.
  2. Demographics in industrialized countries: aging populations have an increasing proportion of 50–65 and this segment saves a lot. This means more savings looking to buy assets such as stocks and bonds: increasing asset prices, hence falling interest rates.
  3. Globalization since 1990 and especially since 2000: increasing incomes in emerging markets combined to opening of global markets has brought emerging market savings to rich-country markets, hence increasing asset demand, higher asset prices, and lower yields. This is the famous “global savings glut” explained by Ben Bernanke in the early 2000s.
  4. Rising income inequality almost everywhere have meant that more of the increasing incomes went to people who save more, because richer people have a higher “marginal propensity to save”, this means that more of the rising incomes have landed on higher-income individuals, who send all that income to… stocks and bonds, hence higher demand, higher asset prices, and lower yields.
  5. Central bank interventions galore have had a double effect: creating all that new money has sent lots of money into markets and lots of that money has landed in the form of demand for assets of all types, hence higher asset prices, hence lower yields. PLUS, these central bank interventions had an extra effect: central banks effectively BUY assets, hence they remove assets from circulation in the open market! This reduces asset supply, which adds more upward pressure to asset prices and downward pressure to yields.
  1. Rising inflation in a convincing way. Not a bit of inflation. I mean permanently rising inflation that triggers a break in the long run trend. This would trigger increasing bond returns and since bonds are a barometer for all assets, it would eventually force asset prices down and interest rates up. All the parked capital would flock to the money market and long term bonds as well as stocks would face falling demand, without central bank support. As I have written many many times before, no inflation, no problem!
  2. Rising taxes on a major scale. I don’t mean a bit more taxes here and there. I mean something really fundamental. A structural shift in governments everywhere that would bring 10 percentage points+ of taxes-income to GDP ratios. This would reprice future growth and profits, hence future asset valuations down and would cause a fall in higher-risk assets, hence lower prices and higher yields.
  3. Major social unrest on a continued and macro scale. I don’t mean riots here and there. I mean real shit that disrupts all of society. This would cause a spike in risk premia everywhere, hence upward pressure on interest rates and downward pressure on asset prices, especially in stocks.
  4. Major geopolical tensions. I mean severe and continued tensions between major countries that drive the world closer to chaos, trade disruptions, and military escalation. Same effect as major social unrest.
Me rock climbing in paradise!



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Pascal Bedard

Pascal Bedard

Sharing thoughts on economics, finance, business, trading, and life lessons. Founder of www.PascalBedard.com