Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
glut of liquidity. low cost of capital. low yields
Old 01-08-2007, 12:58 PM   #1
Recycles dryer sheets
perinova's Avatar
 
Join Date: Apr 2006
Posts: 424
glut of liquidity. low cost of capital. low yields

I am not sure how I connected to this.
I watched. I am not sure I understood the implications.

http://www.yieldsz.com/
__________________

__________________
perinova is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Re: glut of liquidity. low cost of capital. low yields
Old 01-08-2007, 08:34 PM   #2
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Gone4Good's Avatar
 
Join Date: Sep 2005
Posts: 5,381
Re: glut of liquidity. low cost of capital. low yields

Excess liquidity causes asset price inflation which causes low yields and low risk premiums. Low yields and low risk premiums mean low expected future returns. If the excess liquidity leaves the system (perhaps because central bankers around the world increase interest rates) asset values "deflate" turning low returns into very low returns.

Example: The Bank of Japan holds short-term rates at 0% to fight its long-running deflationary problems (i.e. providing liquidity). Investors borrow 0% yen and invest in 4% treasuries earning 4% on almost no equity investment (i.e. very high return on investment). As investors exploit this attractive trade they bid up the price of treasuries and yields decline. If Japan removes the excess liquidity (by raising borrowing rates) the trade becomes less attractive and investors will begin to unwind their positions (by selling treasuries). As treasury prices decline, investors who borrowed to exploit this "carry trade" get squeezed and have to sell too, which puts more pressure on treasuries, etc. etc.

In this simple example the price of treasuries is bid up because of very cheap capital (the Bank of Japan willing to lend at 0%) causing prices to rise and yields to decline. The low 4% yield is already a "slim annuity" but eventually when the cheap capital goes away, prices fall too resulting in even worse returns.

Sam is saying the entire market (real estate, bonds, equities, etc) is akin to the treasury market in the above example.
__________________

__________________
Retired early, traveling perpetually.
Gone4Good is offline   Reply With Quote
Re: glut of liquidity. low cost of capital. low yields
Old 01-08-2007, 09:17 PM   #3
Thinks s/he gets paid by the post
FIRE'd@51's Avatar
 
Join Date: Aug 2006
Posts: 2,315
Re: glut of liquidity. low cost of capital. low yields

Quote:
Originally Posted by 3 Yrs to Go
Example: The Bank of Japan holds short-term rates at 0% to fight its long-running deflationary problems (i.e. providing liquidity). Investors borrow 0% yen and invest in 4% treasuries earning 4% on almost no equity investment (i.e. very high return on investment). As investors exploit this attractive trade ................
Doesn't the forward price of the dollar-yen conversion cause this trade to only yield 0% for the Japanese investor once the dollars are converted back to yen?
__________________
I'd rather be governed by the first one hundred names in the telephone book than the Harvard faculty - William F. Buckley
FIRE'd@51 is offline   Reply With Quote
Re: glut of liquidity. low cost of capital. low yields
Old 01-10-2007, 05:40 PM   #4
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Gone4Good's Avatar
 
Join Date: Sep 2005
Posts: 5,381
Re: glut of liquidity. low cost of capital. low yields

Quote:
Originally Posted by FIRE'd@51
Doesn't the forward price of the dollar-yen conversion cause this trade to only yield 0% for the Japanese investor once the dollars are converted back to yen?
Only if you hedge FX risk. Who says you have to hedge FX risk.
__________________
Retired early, traveling perpetually.
Gone4Good is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Cost Basis - Capital Gains Question Jeb-NY FIRE and Money 16 11-13-2006 08:24 PM
Low cost funds into ETFs? Olav23 FIRE and Money 26 07-06-2005 10:42 PM
Low Interest Rates Here To Stay? Donner FIRE and Money 23 02-13-2005 03:02 PM
Recommended Low Cost Index Fund Tommy_Dolitte FIRE and Money 27 10-04-2004 05:53 PM
Low cost retirement living Skylark Life after FIRE 7 09-11-2004 04:26 AM

 

 
All times are GMT -6. The time now is 07:33 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.