Is the royal bank of Canada leading the way?

Monday, 11 September 2017
Melbourne, Australia
By Bernd Struben

  • Years of lower prices ahead
  • What If Interest Rates Stay Low for the Next 70 years?
  • Only four days left!

When it comes to interest rates, our focus tends to fall on the major players. The US Federal Reserve; the European Central Bank (ECB); the Bank of Japan.

And here in Oz, of course, we pay plenty of attention to the Reserve Bank of Australia (RBA).

So you’d be forgiven for having missed the Royal Bank of Canada’s decision last Wednesday to raise the nation’s cash rate.

Partly, because the exchange rate of the Aussie dollar against the Canadian dollar is unlikely to have a large impact on your portfolio. And partly because the rise was only 0.25%, bringing Canada’s rate to 1.00%.

That’s still below the US Fed’s 1.25% and the RBA’s record low 1.5%.

Which begs the question, is Canada leading the way towards a gradual ‘normalisation’ of interest rates? Or are today’s ultra-low rates the new normal?

When I discussed this with Time Trader’s Phil Anderson, his answer was unequivocal.

We’ll get back to that in a moment. And I’ll also share an almost clairvoyant essay Phil wrote on this issue back in June 2015.

But first, to the markets…

Markets

Over the weekend, the Dow Jones Industrial Average gained 13.01 points or 0.06%.

The S&P 500 fell 3.67 points or 0.15%.

In Europe, the Euro Stoxx 50 index was flat, up 0.03 points or 0.00%. Meanwhile, the FTSE 100 lost 0.26% and Germany’s DAX index gained 0.06%.

In Asian markets, Japan’s Nikkei 225 index is up 260.93 points or 1.35%. China’s CSI 300 is down 0.02%.

In Australia, the S&P/ASX 200 is up 40.28 points or 0.71%.

On the commodities markets, West Texas Intermediate crude oil is US$47.76 per barrel. Brent crude is US$53.94 per barrel.

Gold is trading for US$1,3338.10 (AU$1,663.48) per troy ounce. Silver is US$17.87 (AU$22.22) per troy ounce.

One bitcoin is worth US$4,194.66.

The Aussie dollar is worth 80.44 US cents.

Years of lower prices ahead

The RBA wasn’t alone in leaving interest rates on hold last week.

Malaysia’s central bank — another benchmark you may not follow closely — also kept rates at 3%. And ECB President Mario Draghi, held the European bank’s main refinancing rate at 0%.

We first encountered 0% rates in the US back in 2006. At the time, it was remarkable. Borrowing money at no cost. Yet the Fed held that level until 2013, when it bumped rates to 0.25%.

By 2015 most analysts, myself included, were predicting that interest rates were overdue for a series of more significant hikes. As you know, that didn’t happen. Yet today, most pundits are again in agreement that rates are heading up.

Which brings us back to ‘controversial economist’, Phil Anderson.

Here’s what he wrote to me over the weekend:

The low interest rates this decade are going to be seen by history as structural, not cyclical, in my view.

The tech development will go on in earnest for the entire century. Meaning lower prices every year should actually be the norm.

The high rates of the 1980s were the abnormality, not the current low rates.

Phil’s not saying this simply to be contrarian. He bases his views on centuries of thoroughly researched history.

His exceptional knowledge of what’s occurred in the past — and how it tends to repeat in predictable cycles — is what enabled him to write the below essay back in 2015. Remember that the RBA’s cash rate still stood at a ‘lofty’ 2.5% then. A rate few expected to be cut lower.

But not Phil…


What If Interest Rates Stay Low for the Next 70 years?
Phil Anderson, 15 June, 2015

Interest rates have been going lower for years. In some nations of the West they have now reached 0%, a situation that would have been hailed as impossible just a few years ago.

What if interest rates were to stay low for the rest of the century?

Interest rates have been trending down for years. The best way to show this is via the chart of bond prices. Now remember, bond prices are the inverse of yields, so in this chart below, a rising price means interest rates going lower.

The chart is of the US long bond, 1978 to current:



chart image

Source: Market Analyst
Click to enlarge

Rates have been trending lower since 1981. If we were to show this over the course of several hundred years, we see that actually, interest rates have in the past had a tendency to move in rough 30 year waves; that means roughly 30 years of rates slowly trending higher from all-time lows, then 30 years of the reverse.



chart image

Source: Phil Anderson
Click to enlarge

Historically, interest rates have moved in 30 year cycles, the same as the Kondratieff commodity price wave, but lagging slightly. This chart of bond price history shows us that the very high interest rates of the early 1980s (that many of us remember) were actually a historical anomaly and exceedingly unlikely to be repeated.

And quite often in markets, when things do go to extreme highs, the next thing that follows is extreme lows.

I think low interest rates could persist for years, if not decades. Here’s why:

It is based on a very illuminating study done some years back by David Hackett-Fisher in a large and heavy book called The Great Wave that probably, very few took the time to read. But he uncovered some rather interesting history. (And it is actually a great read.)

Hackett-Fisher found that over the last thousand years or so in the West, the price of consumables, one measure of inflation, has moved in four great waves. He drew it out, this way:



chart image

Source: The Great Wave
Click to enlarge

You can see that each price revolution — each great wave of inflation — has then been followed by almost a hundred years of price stability; low inflation and low (comparably) interest rates. You can see in the chart too, the huge price increase of the 1970s was also an anomaly, historically speaking. (And the chart there is in log scale.)

If Hackett-Fisher is right, the 21st century may witness low prices and low interest rates for many years to come.

Hackett-Fisher wrote the book in the early 1990s when the massive technology revolution was not quite as obvious as it is today. (And goodness knows must have been a lot harder to research without much of the internet as we know it today.)

The scenario of a century of low inflation (and low interest rates), driven by the relentless technology developments currently underway, is now certainly more plausible than ever. And if we add to this scenario the likelihood too, of exceptionally low natural gas prices and the competition this may bring to all other forms of energy, I think the outcome is even more likely.

This is hugely beneficial for all world stock markets. It keeps the debts affordable for the moment as well. All the more room for land prices to keep rising as they take the economic gains that manifest going forward.

Regards,
Phil Anderson


Only four days left!

Inflation rates have barely budged since Phil wrote the above essay more than two years ago. And in many countries, like Australia, they’ve only gone lower.

As for this being ‘hugely beneficial for all world stock markets’ the ASX 200 has been a bit of a laggard. The index is only up 2.1% since 19 June, 2015.

But it’s certainly been true in the US, where the Dow Jones is up 21%. And in the UK, the FTSE 100 is up about 10% in that same time.

Credit where credit is due, Phil’s 2015 essay was yet another bold and highly accurate forecast.

I mention this today, because Phil brings the same extraordinary insight he uses to make these kinds of big picture forecasts into his stock trading service.

You’ve likely heard of Time Trader by now. Colleague Kris Sayce and I both covered the service in detail in Port Phillip Insider last week. You can review those issues, plus a collection of Phil’s essays titled, ‘The Anderson Series’, on our website.

You may also know that Kris talked Phil into opening Time Trader back up to new subscribers. But that offer ends at midnight (AEST) on 15 September. And this may be the last intake of new members until this time next year.

If you want to discover the secret to T.I.M.E.D. stock trading…and how it could benefit you…the countdown clock is ticking.

To get Phil and his team in your trading corner, start here.

Cheers,
Bernd