Seeking Alpha

The Fed's ZIRP is and will continue hurting the economy, argues Charles Schwab, forcing savers...

The Fed's ZIRP is and will continue hurting the economy, argues Charles Schwab, forcing savers out of safer assets into stocks or into long-term bonds that will "backfire on them if inflation returns." Schwab (SCHW) itself is getting slammed, seeing profits cut by nearly 50% in a recent report as it waved fees so money market clients didn't see a negative return.
Comments (12)
  • bbro
    , contributor
    Comments (9319) | Send Message
     
    Does Mr Schwab think there is a huge hidden demand for lending
    out there??
    6 Feb 2012, 11:07 AM Reply Like
  • Tack
    , contributor
    Comments (12726) | Send Message
     
    Mr. Schwab is right on the money, in two respects:

     

    1) Many people grossly underestimate the risks on being in ultra-low-yielding bonds. Price convexivity will play havoc with them when rates reverse.

     

    2) The announcement of continuation of ZIRP for years actually suppresses loan demand, as well as supply. How's that? Well, it's just as if an auto dealer ran a commercial and, instead of saying, "hustle in to see us, 0% financing expires this weekend," the dealer said, "take your time, our 0% deal will be available for the next two years." Nobody would rush on down to buy a car. Hence, we don't see folks rushing out to buy houses, and even though demand is good for some other capital goods, it would be better if people thought rates would rise in the future. Similarly, banks would get more interested in making loans, especially adjustables, if they perceived that rates would be rising.
    6 Feb 2012, 11:56 AM Reply Like
  • Swass
    , contributor
    Comments (419) | Send Message
     
    1) Depends on the bonds.
    2) That's unlikely, IMHO. BBRO's correct in that there is not a large demand for loans right now, even though interest rates are low. This is not because of ZIRP itself, rather ZIRP is the result of no demand in loans. People don't want a loan to expand or improve their business, or personal loans to buy lots of new stuff they don't need, if they feel the economy is in the tank and they might not be able to afford it. Years ago (for example), with housing going up and up and up, the average home owner saw the trend of increasing home values, and thought it would continue forever. So there was no reason not to lever up. Now, that is not the case. They see decreasing asset values, and believe the risk is too great to take a loan.
    6 Feb 2012, 01:49 PM Reply Like
  • Tack
    , contributor
    Comments (12726) | Send Message
     
    Swass:

     

    Loan demand will rapidly accelerate at the first sign of rising rates. Happened before; will happen again.
    6 Feb 2012, 03:03 PM Reply Like
  • Swass
    , contributor
    Comments (419) | Send Message
     
    Usually, but again I'm just suggesting you're putting the cart before the horse. In this case, I contend that rising rates are the result of increased interest in borrowing. In order to understand my point of view, you have to think about the relationship to outstanding credit (money) to prices on goods and services. The more money chasing any one good or service, the higher the price goes. When people actually begin to borrow money, they begin pushing prices higher by using the money expansion capability of credit, which results then in higher interest rates. Higher interest rates come about due to the increased demand for yield when faced with rising inflation due to increased demand for credit.
    6 Feb 2012, 04:15 PM Reply Like
  • Swass
    , contributor
    Comments (419) | Send Message
     
    Tack: Another thing in addition. The Fed is trying to 'reflate' the bubble. That much I think we can all agree. If what you said were correct, then all they would have to do is raise rates and all the sudden everyone would want to borrow. Raising rates in a time when there is little interest in borrowing will do essentially nothing. Perhaps it would even decrease demand for loans even more, resulting in increased downward pressure on prices and outright deflation. That is exactly the opposite of what the Fed wants, even though they'll never be able to get what they want.
    6 Feb 2012, 04:46 PM Reply Like
  • Tack
    , contributor
    Comments (12726) | Send Message
     
    Swass:

     

    Fully understand, but demand is and will increase, especially as employment improves, which it is. Keep in mind that current short-term rates have nothing to do with actual market set points, but rather the Fed's concerted efforts. At some point (hopefully) the Fed will switch from oversupplying liquidity to worrying about the economic effects of massive liquidity, if that money actually starts moving.

     

    I predict the effect on short-term bond rates and on borrower's behavior will be prompt and dramatic. I can't specify the date, just what will occur when it arrives. That's why, to the extent that I hold debt issues, they're almost all convertible or floating-rate issues.
    6 Feb 2012, 05:02 PM Reply Like
  • jhooper
    , contributor
    Comments (5328) | Send Message
     
    Careful there Tack. Loan demand might increase, but not the credit quality of those that want to do the borrowing. Just because someone wants a loan doesn't mean they will get it. The problem is that asset prices across the board are just too high to fit with current productivity levels. The millions of unemployed might have alot of aggregate demand, but they don't have the ability to consume because they have no income because they don't produce anything.

     

    Nothing is going to materially change anytime soon unless we drive down the costs of production. We can either do that with a sudden leap forward in technology, or a rigorous non-wild-eyed-fanatical review of our regulatory structure. Our code of Fed regulations is almost 10 yards long, and they try to convince us that there is absolutely nothing in there that is written by special interest to damage competition.

     

    Barring that, we will have to wait for normal technology gains to drive down production costs and finally provide economic opportunities for the unemployed, but that could take 10 yrs. I doubt the Fed will raise rates in any meaningful way anytime soon. I think the incentive structure right now is to continue to transfer wealth from fixed income investors to equity investors. For the immediate future good news will be good news for equities and bad news will be good news for equities.
    6 Feb 2012, 05:10 PM Reply Like
  • Tack
    , contributor
    Comments (12726) | Send Message
     
    Swass:

     

    You seem to think that economic incentives don't work any more in current conditions. I see human nature differently.

     

    People postpone risk, as long as the postponement incurs no penalty. When they have to decide between a penalty for not acting (rates) and the risks of doing whatever they intended to do, then, it get dicier. Take, for example, the Cash For Clunkers. Here's was an incentive program launched in the middle of the worst parts of the crisis, and people flocked to dealerships, especially as the incentives were about to expire.

     

    I believe that there are vastly more people able and interested to buy homes than shows up in the actual activity, now. These people are fearing lower prices, but have no fear of higher rates, so they have no incentive to choose to act. This will change when rates signal a rise. The Fed can make that rise occur all by itself because it doesn't take a change in the "market;" it just takes a change in their artificial behavior.

     

    In any event, I'm not sweating any of it because I am allocated for current conditions or those of higher rates. If the economy and markets collapsed entirely, then, I'd need to adjust allocations, but I don't see that, presently, on the horizon.

     

    By the way, the beauty of floating-rate issues, now, is many of them are selling at their mandated floor yields, so they cannot go lower, even if rates would fall, but they will adjust higher, if rates rise. A win-win.
    6 Feb 2012, 05:11 PM Reply Like
  • bbro
    , contributor
    Comments (9319) | Send Message
     
    Somehow the car decison is not neing driven by interest rates...more
    likely job prospects and potential income growth...as those pick up
    loan demand will pick up and interest rates will rise....
    6 Feb 2012, 12:04 PM Reply Like
  • Mad_Max_A_Million
    , contributor
    Comments (1175) | Send Message
     
    bbro? As people see us slipping over the cliff, investment in debt will become near suicide. What you see now is an election year (tell the people what they want to hear scam) followed by a depression the following year. This in not rocket science. It's history. If you ignore this, you have more balls than a Chinese ping pong tournament.
    6 Feb 2012, 01:19 PM Reply Like
  • WMARKW
    , contributor
    Comments (10249) | Send Message
     
    Well, when my mother's 3% + CD's mature, I will definitely not be signing up for another 4 years at 0.88%. Ha....what a joke. Looks like precious metals or dividend stocks. Seems dividend stocks will go the way of the bond market. Bid the prices up to the stratosphere until the yields fall to near treasuries.
    6 Feb 2012, 01:49 PM Reply Like
DJIA (DIA) S&P 500 (SPY)
ETF Tools
Find the right ETFs for your portfolio:
Seeking Alpha's new ETF Hub
ETF Investment Guide:
Table of Contents | One Page Summary
Read about different ETF Asset Classes:
ETF Selector

Next headline on your portfolio:

|