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August 28, 2019 | The Vicious Cycle of Inflated Asset Prices and Low Yields

Danielle Park

Portfolio Manager and President of Venable Park Investment Counsel ( Ms Park is a financial analyst, attorney, finance author and regular guest on North American media. She is also the author of the best-selling myth-busting book "Juggling Dynamite: An insider's wisdom on money management, markets and wealth that lasts," and a popular daily financial blog:

Funny thing about low and negative yields on savings…they make people save more and spend less, which slows the economy, which makes central banks try to lower rates more, which makes people need to save more and spend less…which slows the economy more.

At the same time, savers, pensions, insurance companies and other critical institutions get sucked further and further down the capital risk hole into more and more illiquid bets trying to reach for higher yields which then blows big chunks off the capital in downturns, which then forces higher contributions, more savings and/or restructuring to pay out less…which causes people to cut back spending, which slows the economy further and spreads instability.  See Pension world reels from ‘financial vandalism’ of falling yields:

The plunge in yields risks spawning a vicious circle for the industry. The squeeze on returns tends to widen funding gaps, forcing managers or employers to inject more cash into the plans. That’s money which could have otherwise been used to fuel business or consumption so economic growth may take a hit — boosting calls for even more monetary easing.

The only way out is less debt and lower asset prices which will then come with investment-worthy higher yields.  In the meantime, working longer, spending less, saving more and avoiding over-priced assets are the best course to survive and thrive through this unprecedented time-for-the history-books.

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August 28th, 2019

Posted In: Juggling Dynamite

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