YouTube Reader Comment 05/16/2020

[YouTube reader comment 05/16/2020] Easy Investment Chat CLEC Investment Channel. Post date: May 18, 2020

Q:

Hi, teacher. I noticed that in your recent videos you added linear technical analysis, individual company financials, and industry trends, on top of the original buy-and-hold ETF long-term investment concept. I believe this will attract more different types of investors to watch the videos and understand your investment ideas. I also appreciate your presentations; they have Buffett's style. I would like to ask your view on U.S. zero interest rates, and even possible negative rates in the future, and their investment impact. Buffett said that in the short term, U.S. stock assets will rise because of this, but in the long term it is not a solution to the economy. Bill Gates seems to hold a similar view: we cannot use past judgment methods to measure the stock market. For a small retail investor, how can we follow the market trend and preserve the assets in our hands?

A:

Thank you for your comment and for the very good question. I think this is also something others want to understand.

Interest rates are the value of money. The lower interest rates are, the less valuable money becomes.

So Buffett said that if current interest rates are correct and normal, then current asset prices are too cheap. Under normal circumstances, if companies have high profits, interest rates should rise; if corporate profits fall, interest rates should fall. That would be normal. But the current situation is that many large high-tech companies have high profits while interest rates are at historical lows. This means the overall economy is imbalanced. The big become bigger; small businesses and traditional industries struggle to survive, while large technology companies earn even more. This will make large companies even larger in the future and widen the wealth gap: the rich get richer and the poor get poorer. This is also the difficulty of capitalism and monetary policy. That is why there may be future thinking around asset taxes, guaranteed income, and guaranteed wealth.

As for interest rates being low, whether zero or negative, the most important purpose is to protect liquidity and stimulate liquidity. But QE and easy money can achieve the same effect for both tasks.

Zero interest rates can reduce pressure for people who have already borrowed money, while QE and easy money are the tools that can best provide liquidity, not low or negative interest rates.

Negative interest rates are meant to stimulate more lending. But Sweden's experience shows that negative rates can stimulate lending the first time, but after a while they lose that function.

So negative interest rates are not a cure-all; they are a kind of poison. They make people who did not need to borrow money, or people who borrow money without knowing what investment to make, borrow casually and randomly. That lowers capital efficiency, while the debt has already been created. This will cause future economic momentum and social consumption to lose speed.

For the United States, the dollar is the world's reserve currency. There are so many U.S. bonds around the world. If the United States implements negative interest rates, it will reduce U.S. credit, shake global confidence in U.S. Treasuries, depreciate the dollar, and slowly shake the dollar's reserve-currency status. A strong dollar is an important condition for protecting dollar hegemony. We will wait and see what decision the United States makes, and that will also determine the future fate of the dollar and America.

No matter what interest rates look like, asset investment is the only way to protect our assets and future growth returns. Many economic policies, fiscal policies, and global political situations are not things we investors can worry about, and worrying will not help. The only thing we can do is focus on our asset investments. As long as political, economic, fiscal, and monetary policies do not create adverse effects on our asset investments, we keep doing what we should do: index investing, long-term holding, and no trading.

This is only my personal logic and judgment about possible situations. If you have a different way of thinking, please share.

Thank you again for your comment. If you have any questions or suggestions, please keep leaving comments for discussion.