Low Interest Rates Are ‘Poison,’ Says JPM Savant

Lower for longer has been the mantra of Wall Street ever since the Great Recession. Well, according to JPMorgan Asset Management’s chief global strategist, perennially low interest rates are “poison.”

“It’s not possible to stimulate that much economic growth by taking the cost of capital lower,” David Kelly said, in a presentation of a paper he and his colleagues wrote. “Households have far more interest-bearing assets than interest-bearing liabilities … so when rates fall, you don’t have any benefit.”

In the paper, called “The Failure of Monetary Stimulus,” Kelly argued that low rates lower income for savers and fixed-income investors, saps confidence about economic prospects, and discourages borrowing as people anticipate even lower rates. Borrowing, he contended, is key to propelling economic growth.

“Any medicine, taken to extreme, turns into a poison,” Kelly declared. “There is this assumption out there that monetary stimulus is becoming less effective over time. But it’s quite possible that it is not just less effective, it is actually counterproductive.”

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Partly as a result, Kelly said, the US economy will grow about 1.9% annually over the next decade or so, in keeping with its sluggish growth since the financial crisis—a disaster that compelled the Federal Reserve and other central banks to slash rates as a stimulus measure.

The low rates helped the industrial and housing sectors, he said, but at the expense of the larger group of savers. “The expectation of low rates forever more is telling people there’s no need to borrow money now,” he said, in an account by Business Insider. “The whole way you stimulate an economy is to tell people ‘don’t wait and see, do it now.”

Come the next recession, he said, central banks will have an unpleasant surprise. They “will probably provide more monetary easing,” he predicted, “which actually won’t cure the patient at all, and therefore leads to even more” rate reductions.

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Tags: David Kelly, Federal Reserve, Interest Rates, JPMorgan Asset & Wealth Management

The $242.1 billion California State Teachers’ Retirement System (CalSTRS) warns that a proposed rule change by the Securities and Exchange Commission regarding proxy voting advice is unnecessary and will only “weaken investors’ ability to hold corporations accountable.”

The proposal, which the SEC said is intended to improve the accuracy and transparency of proxy voting advice, was announced on November 5, and is currently in its 60-day comment period. The California pension giant, which relies on proxy advisory firms to get independent research to help inform its proxy voting and engagement decisions, wasted no time in voicing its objection.

“The proposed proxy advisor rules would require proxy advisors to gain approval from the very companies they are researching before they can release the reports to their investor clients, hampering the proxy voting process which is our fiduciary responsibility,” said CalSTRS in a statement. “We strongly urge the SEC not to burden investors with requirements that would compromise independence, effectiveness and competition for proxy advisors.”

The regulator said the rule changes are needed because proxy voting advice businesses have been the subject of criticism for potentially being influenced by conflicts of interest. There is also concern about giving inaccurate voting advice and using “one-size-fits-all” methodologies.

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“Proxy voting advice business clients may have goals other than, or in addition to, share value maximization or may have investment objectives that would not be achieved solely on the basis of a positive market reaction,” said the SEC in its proposal. “Because investors may be willing to forgo share value to the extent that doing so allows the investor to achieve other goals, we are unable conclusively to infer recommendation quality from stock market reactions.”

This is nothing but a straw man argument, according to CalSTRS, which said the SEC’s claims are specious and lack the evidence to back them up.

“The proposed rules seek to solve problems that simply do not exist,” said CalSTRS, “and further diminish the rights of shareholders and their ability to hold corporations accountable.”

CalSTRS, along with other members of the Council of Institutional Investors, sent a scathing letter to the SEC in late October, challenging the regulator over the existence of pervasive factual inaccuracies in proxy advisors’ reports. It said “the paucity of evidence of systematic factual errors” suggests that no such evidence exists, and that the opposite must be true.

The letter argued that most claims of pervasive proxy advisor inaccuracy are “mere assertions and entirely undocumented.” It said the SEC’s attempts to support these claims yielded “extraordinarily weak” evidence that is clearly insufficient for basing a rule change on.

“We believe that the SEC should not regulate proxy advisors in the absence of good evidence,” the council said. “Before the SEC proposes further rulemaking, it should do its homework to establish the predicates for regulation.”

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Tags: CalSTRS, Council of Institutional Investors, proxy voting, SEC