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‘Unsustainable Inconsistencies Could Lead To Sharp Adjustments’, One Bank Euphemistically Warns

"...this does not necessarily lead to a healthy and sustainable economy".

"...this does not necessarily lead to a healthy and sustainable economy".
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4 comments on “‘Unsustainable Inconsistencies Could Lead To Sharp Adjustments’, One Bank Euphemistically Warns

  1. Sounds like a book I once read called …. “Learning to Walk a Tightrope ” ….by Goldilocks… Standard reading in 2nd grade.

  2. “low rates and expectations for even lower rates are distorting the pricing of risk”

    As a bit of a novice with respect to the relationship between rates and the pricing of risk, how do the two interact? What is the dynamic at play?

    My interpretation is that lower rates encourage greater risk taking as a result of the availability of money (thereby impacting risk pricing), however that strikes me as simplistic and I feel I may be missing some critical nuance.

    • “lower rates encourage greater risk taking as a result of the availability of money (thereby impacting risk pricing)” – that’s definitely a factor, the other is just the mechanical aspect of discounting any asset that produces a stream of income (dividends from stocks, interest from bonds). The lower the discount rate, the more valuable these streams of future payments are and thus the asset itself reprices higher

  3. Low rates
    – Pressure income investors to take more risk (credit, duration, etc) to get required yields
    – Help companies continue over-investment, operating losses, low return projects, M&A and excessive share buybacks
    – Raise valuations that use discounted future cash flows

    I’m sure there’s other ways that low rates drive risk seeking, e.g. in the derivatives markets.

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