World Out Of Whack: An Absurd Unintended Consequence Of Abnormally Low Rates

Market dislocations occur when financial markets, operating under stressful conditions, experience large widespread asset mispricing.

Welcome to this week’s edition of “World Out Of Whack” where every Wednesday we take time out of our day to laugh, poke fun at and present to you absurdity in global financial markets in all its glorious insanity.

While we enjoy a good laugh, the truth is that the first step to protecting ourselves from losses is to protect ourselves from ignorance. Think of the “World Out Of Whack” as your double thick armor plated side impact protection system in a financial world littered with drunk drivers.

Selfishly we also know that the biggest (and often the fastest) returns come from asymmetric market moves. But, in order to identify these moves, we must first identify where they live.

Occasionally we find opportunities where we can buy (or sell) assets for mere cents on the dollar – because, after all, we are capitalists.

In this week’s edition of the WOW: An Absurd Unintended Consequence Of Abnormally Low-Interest Rates

Even the dullest amongst us have heard about compound interest.

The story goes like this: you can become wealthy – not rich, but wealthy – by foregoing those lattes, $100 haircuts, and saving a decent portion of your income. You earn interest on those savings and let it compound.

By the time your hips are giving in and your bladder has begun to leak it’s all turned into a decent little stash while the Jones’ next door who’ve spent their lives upgrading the Lexus every year and holidaying in Hawaii will be asking you for a loan to pay for the leaking roof.

This all works when you can actually earn interest on your money.

And so ever since our central bank overlords with their well-intentioned but entirely destructive policies have driven rates through the floor the ability to achieve yield has been destroyed.

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Disclosure: None.

Disclaimer: This site is not intended to render investment advice.None of the principles of Capex Administrative Ltd or Chris MacIntosh are licensed as financial professionals, ...

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Moon Kil Woong 2 years ago Contributor's comment

Very insightful. Unfortunately the Federal Reserve and central banks are more near sighted than almost any market participant these days and is why they all move behind or opposite of the curve. The consequences of low to zirp rate policies are horrible because it primarily undermines capitalism and distorts not just prices of assets but even worse destroys cash flow which underpins credit. It becomes almost impossible to get things started again because rates will need to rise and no one has cash flow from investments after the bubble tops off. This all hits when no one can get more credit. UGLY.