Welcome back. Asset Return.
Today I will make a new update of my Asset Returns Table.
As you can see stocks continue to deliver excellent returns. In financial markets, it’s very hard to understand if some asset is too expensive or even entering into bubble territory. Thus let’s talk about this moment.
Understanding what is happening
In my humble opinion, financial markets are being massively supported by central banks. Therefore we can see that short-term rates remain below 1% (United States, Euro Zone), and long-term interest rates on government bonds are also low.
10-year bond yields – Japan 0.03%, Germany 0.36%, France 0.79%, UK 1.04%, Spain 1.55%, Italy 2.11%, US 2.25%, Portugal 3.16%, Greece 5.89% (May 25, 2017).
As we’ve talked before, the inflation has not met the central bank’s target. Thus I find it hard to believe that this policy of really low-interest rates will cease anytime soon.
It’s truly incredible that people are willing to invest in bonds that continue to deliver really low returns. And for so long.
I believe that the 2008 crisis is still very present in the memory of all investors. Also in Europe, I believe that the high taxes on capital returns keeps investors from taking more risks. Why should I take some additional risk, if a significant part of my return – if I have a positive one – will go to the government?
What about the future?
I still believe that the major driver of changes in the central bank’s policy will be the inflation rate. In particular the core inflation.
One thing that governments could do to accelerate all this, would be to lower aggressively the taxes on capital returns. Especially for a determined annual return.
For example, for the first 10.000 Euros (or Dollars), the tax should be zero, and from that value on, gradually increase. All this on an annual basis.
As a result, and in my opinion, this would stimulate the majority of the population to invest more aggressively, and consequently put their money to work immediately.
With fewer taxes, normally the average individual is more willing to invest. Thus increasing the possibilities of creating an additional stream of income. With more (and diversified) income, everyone will have more options and face the future in a more positive way.
In conclusion, if you have more confidence you will invest for the long term (professionally, personally and as an investor). Probably many will even try to create their own business.
Having more than one stream of income is even great from the psychological point of view. Because if you suffer some future negative event (whether in your work or investment), you can tolerate that moment more easily.
One of the drawbacks of having highly efficient central banks (with their low-interest policy) that helped to endure the 2008 crisis, is that governments feel less motivated to make reforms in order to facilitate investment and everything good that comes with the more intense circulation of capital.
Therefore, let’s hope that central banks and governments work together to increase the confidence of investors, and to accelerate the change of the low-interest policy. Before any new bubbles arise in financial markets.
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