US Interest Rates Likely To Stay Low

Every time you buy a car, a home or make mortgages, you deal with interest
rates. For decades, the US and world economy lived under ‘normal’ interest
rate which range 4% to 22%.
The 2008 financial crisis brought us a whole new chapter on interest rates,
which is historically low. US fed fund rate goes down to 0.1% point while
others interest rates indicators all follow. We have now a cheap money
system that keep economy going.
Skeptics rise over the concern of cheap money, saying a potential greater
economy hit when the cheap money effect on economy subsided.
We are Timberland Academy and we do simple research on financial case
study and economy developments. Here are 4 reasons why we think interest
rates will likely to stay low.
First reason, the corporate debts.
The US non-financial corporate debts of large companies now reach 10 trillion
dollars compared to 6.6 trillion dollars in 2008 according to data from the fed.
This was fueled by cheap money, low lending rates and essential free money.
All over, the market is flooded with money. Who doesn’t want debt when it is
all free? Capital intensive business takes so much debts, until most are so
vulnerable to an increase in interest rates.
The utilities companies for example have been piling up debts since the 2008
crash. They do it on purpose to expand, building new facilities and upgrading.
Duke Energy alone is having debts of nearly $57 billion over $47 billion of
equity.
While we will cover the utilities companies on another video, we stay here on
interest rates. Others company like steel, oil production and exploration,
pipeline also own large amount of debts. Just imagine, what happen when the
fed rises interest rates just a nimble. Most utilities companies have an interest
coverage ratio of just 2-5 times. But some are weaker. Take Duke Energy, its
interest coverage ratio just a merely 2.28 times!

Second reason, the inflation rates in under control, at least for now.
While free money is everywhere, inflation should be shooting up. Yet, not the
case here. From 2008 to 2019, the inflation is averaged only 1.63%!
Warren Buffet once said stocks are cheap because the whole free money
machine didn’t bring much inflation expected. Which in another words, free
money works for the economy, for now.
Corporate can use this free money to expand, earn profit and pay off interest,
since the cost of debts is so low. The fed has always set their inflation rate
target at 2%, viewing it as a great gauge for interest rates adjustment.
Third reason, banks’ derivatives asset.
We made a video on banks derivatives before and remember to check in out.
For banks in the US and Europe, low interest rates environment made their
conventional loan business hard to survive. So, they venture into derivatives.
Deutsche Bank in particular is having big problem with its huge notional
amounts of derivatives. JP Morgan, Citibank and other US banks also own
this dangerous stuff. But, Most of the notional amounts of derivatives in these
banks are interest related. Meaning, they are tied to interest rates.
The fed is well-aware of this activity and they are trying to find balance
between them. If the fed rises the interest too fast, most derivatives will cause
significant damage to these banks. They will incur big losses as their
derivatives asset become liabilities and they have to pay their client, who
make these arrangements with them. And all over, banks will meet big
problem after all.
Fourth reason to believe why interest rates will stay low will be related to the
strong dollar.
President Trump have been pledging low interest rates for the economy and
he hates strong dollar. The US 30-year treasury rate once went up from 2.2%
till 3.4% after president Trump win the 2016 election, make the US dollar to
surge against a basket of world currencies. The dollar index once breached
100 point at the time. Yet, he brought it down all over.
A strong dollar makes the US economy more vulnerable and their goods hard
to sell. Also, making American goods more expensive. China have been using
their cheap currency over the decade to sell their stuff all over the world.
Making their country’s factory the world factory. Their central bank keeps their
currency low enough to support export.
Moreover, a strong dollar could be bad for large-cap multinationals because it
makes their goods more expensive and eventually makes oversea consumers
to turn away from American goods.
These are the 4 reasons we believe why the interest rates will very likely to
stay low.
We hope you guys enjoy it and don’t remember to subscribe and leave your
comment below.
See you!