Why low interest rates create low capital investment

Low rates disfigure the market's pricing signals, so many cash-rich dinosaur companies are not investing in the real economy. What to do about this trend. 

1. BILL GROSS

   In the Financial Times (FT) of 18th August 2016, Bill Gross penned a particularly brilliant piece, "Central bankers are threatening the engine of the economy". His rhetorical question is "But are near zero interest rates and a global store of about $13 trn worth of negative-yielding bonds actually good for the real economy?" He thinks not. I agree: low rates just distort the market's price signals and thus make the wrong people rich.

2. WHY PEOPLE DON'T INVEST IN THE REAL ECONOMY

   Indeed, his other rhetorical question is "Why would the private sector or governments not borrow at practically no cost to invest in a centuries old capitalistic model proven to reward risk-taking in the real economy?" He cites three secular trends that disincentivise companies from investing in plant, machinery and equipment (PME). First, demographics: we all are ageing, and this brakes consumer demand. Secondly, anti-globalization: BREXIT is the most recent ugly emanation thereof. Why invest in PME when structures all around you are ex- or imploding? Finally, "savvy corporate Chief Investment Officers who know anything about bond pricing may also recognize that an investment in the real economy - albeit at historically low borrowing costs - will pose its own risks once yields begin to return to normal and borrowing costs increase."

3. MY OWN ADDITIONS

   First, as we pointed out a little while ago, low interest rates make older people save MORE in order to stock-up their pensions; hence, consumption suffers. So why invest if consumption is slowing? Secondly, pricing power has gone to the wind: supply curves are infinite these days, so that anachronistic my about "too much money chasing too few goods" is a catchy shibboleth, but not for forward-looking policy-makers concerned about creating employment. With pricing power out the window, so are many margins. Look at banking.  And finally, particularly Europe's and Japan's politicians refuse to reform, so instead they institute regulatory inflation. Why invest if you cannot fire employees reasonably efficiently?

4. INVESTMENT IMPLICATION

   Don't invest in dinosaurs. Those who fight with swords get shot. Forget investing in the capital goods sectors of Japan and Europe that are very domestically - orientated: their politicians have regulated themselves out of growth.  Instead, buy into new economy tech and especially into quoted fintech companies.