A new world….

Tuesday 4th October 2016

In this issue of Money Truths….

  • A new world….
  • The winners….
  • The losers….
  • The challenge ahead….

A new world….

I’ve been banging on about low interest rates – and closely-related issues – for the last few weeks….

I expect you’ve noticed. You probably think I’m a bit of a pointy-head – one of those pipe-smoking pseudo-intellectual types who likes to while away the hours thinking deeply on big floaty ideas and themes….

But I can assure you I’m not. My wife will confirm as much. I can often get quickly out of my depth helping the children with their homework assignments.

But sometimes these big ideas have to be grappled with.

Big ideas like ‘the economy’, that seem only to exist somewhere far removed from reality or in the editorial columns of big newspapers, have this funny habit of filtering down the food chain and making a big impact on the life and prospects of the man in the street.

Interest rates are at an all-time low. The price of money has never been cheaper. And the point I really want to make – and have probably not been clear enough about – is this: low interest rates are here to stay deep into the foreseeable future.

I’m confident about that. I don’t expect to see interest rates rise any time soon. And if they do, then it will be a token rise. Certainly nothing substantial.

I’m confident about that because interest rates have been set so low for the last 8 years primarily to stimulate growth in the economy – not just here in Britain but all over the developed world. And it hasn’t worked. Economies are growing sluggishly in some cases and not at all in others.

Despite the lowest interest rates since the dawn of civilization, growth is almost non-existent.

The brutal fact is this: returning interest rates to anything resembling the norm or the long-term median would not only retard growth and put it into reverse gear, but would also serve on the wider economy, and the lives of the people within it, a shockwave that would make the financial crisis of 2008/2009 look like a blip in the figures.

Low interest rates are here to stay. As individuals we must accustom ourselves to life in a low interest world and take steps to solve the financial conundrums such a world presents us with.

The winners….

Of course, let’s not be overly negative, a sustained period of low interest rates is good news for some sections of society.

Lower mortgage repayments for home-owners means they have more discretionary income to spend.

Businesses can, in theory, borrow cheaply – reducing the cost of investment. The same applies to consumers.

Government also benefits – as a result of cheaper debt repayments. Bond yields are at an all-time low. In some cases yields are negative.  And if government wants to borrow – to fund infrastructure projects, for example, – then it is able to do so at a nominal rate.

Interest rates have other effects too. Britain’s low interest rates have played a large part in reducing the value of the pound. The upshot of that is that Britain is currently a cheap place in which to buy compared to other countries.

This is good news for export-oriented businesses. The current economic climate in Britain represents a hothouse in which they can thrive.

For example, right now British businesses that build and fit-out palatial ocean-going yachts are enjoying something of a boom time as wealthy Russian oligarchs and the like flock to these shores to place their orders for these shiny trinkets.

All across the board the manufacturing sector is enjoying rising output and a steady flow of new orders. The CBI reported ‘brisk growth’ at the end of September.

So much for the winners. I don’t know about you, but I’m struggling to recall the last time I built an ocean-going yacht. I’m just an ordinary man-on-the-street. And in a low interest environment the ordinary man-on-the-street is often a loser in the situation – the one who takes the blows and pays the price….

The losers….

As a child my parents always encouraged and advised me to save money. It’s a good life lesson parents can pass onto children. It makes absolute sense.

It is a good thing to have a nest-egg of savings squirreled away for a rainy day. Few but the profligate and the foolish would argue with that. It is the prudent move. And, at least back in the day when things were as they should be, there was a pay-off. The money you saved earned a decent rate of interest – and compounded over time.

Of course, you can still put cash on deposit at the bank. But what’s the point? The interest rate on bank deposits in 2016 makes it hardly worth the shoe leather you’d use walking up the High Street with your account book.

Put your money on deposit in the bank today and the rate is so low that after inflation, your money is actually losing value year-on-year.

And it could get worse. If or when negative interest rates are introduced, you’ll effectively be paying the bank for holding onto your money. Leave it there long enough and you could find there’s nothing left when you need it.

ISAs are not what they once were – in terms of interest or tax advantages. Bonds offer a yield little better than the thin end of nothing whittled to a fine point.

So, in a low interest rate environment, what does the man-on-the-street do with his spare capital? Where does he find a risk-free vehicle that offers a decent return? How does the pensioner who lives on his savings go about growing his pot?

And that’s the problem in this new low interest environment of ours. Where indeed?

Money that might once have been held on deposit in some form is now being forced into riskier investments – in search of yield. Investors are increasingly looking to investments situations they probably don’t fully understand – because they don’t know where else to look. And that could be a recipe for disaster.

The stock market? A lot of people think that’s the solution. It certainly seems to keep going up. But therein lies the problem….

Part of the rise the stock market has enjoyed in recent times is down to an inflow of funds into shares that offer dividends – money that would once have been deposited in savings accounts or bonds. Part of the rise is money seeking to benefit from the natural spoils of a rising tide.

There are probably a whole raft of reasons behind the current situation in the stock market. But, whatever they are, the bottom line is that the FTSE 100 and the FTSE 250 are not far off their 10-year-highs. Stocks are expensive when viewed against the historical backdrop.

No market grows to the sky. It has to – and will – fall back to Earth. Just as night follows day. For me that will be the time to buy. Now is a good time to be out of stocks.

Investors going into the stock market right now are likely to find it the furthest thing possible from a guaranteed long-term source of yield. They could find it a very painful experience.

The challenge ahead….

I still haven’t answered my own question: where does the man-in-the-street look for safe and decent yield in a low interest rate environment?

There is no one right answer. Just a range of options and ideas.

And that’s one of the things I want to do with the Money Truths letter in the weeks and months ahead. Among other things, I want to investigate and discuss some of those options – many of which you won’t currently be aware of but which you might find very useful in the prevailing financial climate.

There are some savvy folk out there in the world doing things a bit differently and making some interesting moves. Some will be more successful than others. No doubt we’ll come across our fair share of crackpot ideas.

But it pays to look. It pays to be inquisitive. It pays to investigate. It pays to check things out and learn lessons we can put to use – out there in the real world.

Interest rates are at an all-time low. They are here to stay. We must accustom ourselves to life in a low interest rate world. The new environment poses serious challenges. But not insurmountable ones.

You can trust Money Truths to bring you the lowdown on potential solutions to these new world problems.

That’s how it looks from here….

All the best,


Dave Gibson

Money Truths