The New Normal. Low Interest Rates Forever.

The markets, investors, consumers, politicians, and most importantly savers had better come to the grip with the fact that we have low interest rates for as far as the eye can see right now.  The New Normal is a normal where consumers spend less, banks lend less, and putting your money in a FDIC insured savings account is not going to cut it for any real income.  This is as is was in the late 1930's and since we are reliving that economy one can expect low interest rates for at least another decade plus.  I would bet another couple of decades. 

The Federal Reserve has been saying low rates forever for some time now as any attempt to raise the federal reserve rate has been met with stock market sell offs and most importantly the US ten year Treasury Bond selling off down to right at 1.6% and today is still trading below 2%.   Bond ghouls are fear ghouls and those same traders know what is becoming obviously to everyone except those who pine for a pro-growth economy we are dead in the water for a long time.  Like it or not the idea of thinking the real normal for lending rates is somewhere in the 3% to 5% range and ten year bond rates is silly, almost as silly as the same people thinking a return to the gold standard will solve all our currency issues. 

The reasons for this are quite simple.  Millennials and Generation X having either been born into or lived through the Great Recession have cut spending and cut household costs to the bone.  They are saving their money and holding onto jobs too. In the past this would have been considered a good thing when the Greatest Generation having itself lived through the Great Depression put spending on hold and saving on cruise control.  These generations are not buying homes and taking on debt and when they do are making sure to buy what they can afford if and when economic times turn down again.  They are not buying new cars either, the recent surges in vehicle buying has been mostly done by those over 50 years old in secure jobs or safely in retirement with disposable income.  The are buying into "experiences" like inexpensive travel and dining out, which is cheaper than big ticket items and can be done on a debit card.  Nothing tells this story better than the fact the credit card companies are getting hit hard right now by the significantly heightened use of debit cards by the younger set. All this in turn mean banks have lots of money to lend and no one to lend it to. So with no demand for loans there is no demand for savings to lend.  Rates stay low on both ends. 

Politicians best come to understand this new normal.  There is going to be a reckoning day with deficit spending and over allocated medicare and social security accounting too.  I will bet with anyone right now as the more adult leaders in the Generation X, supported by more sober leaders in the Millennial ranks assume more power in Washington DC as many have in state capitals there will be a changing of how the Federal Government spends, or more precisely NOT spends. 

There will not comeback for the markets and investors need to get on board here too.  The markets will move up and not go backwards as some expect, but that moving up will be in the 4% to 6% category, not the former double digit gains annually we have known in the past.  Much of this new normal reset is the fact that with inflation low and consumer prices growing at a snails pace that market gains will be similarly depressed.  However with interest rates at 1% and a market growing at say 5% the result are assets there growing correctly as compared to inflation.  Again we suggest S&P 500 index funds for most people and a sprinkling of managed stock assets to add some additional protection to long term growth.   What will likely happen is many people will keep their savings in saving accounts freeing them from stock market fear which is so recent to most workers. 

Some advice for you savers who worry about markets.  Your ancestors who lived through the Great Depression did the same and kept passbook savings accounts and such for years to avoid stock market crashes.  That portion of our history is past us now so put some of your hard earned savings into the stock market and you will be ahead of your peers several decades from now when you are looking into the retirement years. 

This new normal is frankly not so bad if you consider the change in spending and savings habits of younger workers.  Maybe we need to get used to a no growth economy and learn to invest and live in it.   Stock buy backs and safe dependable dividends from large corporations is still something to desire if you have assets to invest or building assets to invest.  Slow growth and stable markets can be rewarding if you are taking a long term view and a long term view is the best choice for smart savers and investors.