Economy

(New York)

This Wall Street Journal article lends some much needed perspective to the current panic over the ultra-low level of interest rates. The author presents a statement of facts which shows that yields have actually been negative many times in history, including for much of the 20th century. The key to understanding this is to take account of “real interest rates”, or what rates actually are after accounting for inflation. For instance, by this understanding the yield on Treasury bills was negative for 18 out of the 27 years between 1933 and 1959. In the 1940s and again in the 1970s, negative real rates were common. The author’s driving point is that this has happened many times before, just not within the lifetime of most investors, and not while inflation was so low. He thinks returns will continue to be low and people will simply have to save more.


FINSUM: This article lends some good perspective on the current state of the economy, though it is still worrisome that real rates are so low without any inflation.

Source: Wall Street Journal

(New York)

It might be time to prepare for a downturn in the real estate market. We ran an article a couple of weeks back discussing how US commercial real estate prices were falling and that the market might be headed downward. This article, in the Financial Times, now argues that REITS may be set to tumble. The sector has historically performed very well, and especially well recently, which has pushed its yield to only a ~1.1% premium over the S&P 500 as a whole. With the commercial real estate sector getting more expensive and competitive, this combination will likely mean the REITs are set to fall.


FINSUM: We have mixed views on this. On the one hand, we think that the paltry returns elsewhere might mean that real estate keeps seeing inflows. However, on the other, the sector looks overextended, which naturally leads one to think it will fall.

Source: Financial Times

(Houston)

The long-term health of the US shale industry looks very strong, contrary to what many may think. A new industry report communicates that 60% of the world’s oil reserves that are economically viable at $60 per barrel are in US Shale. US shale wells have done a remarkable job cutting costs 30% to 40%, making them competitive on the global market. The huge amount of US shale reserves combined with the lower costs means the US will likely enjoy a competitive advantage over the next few years, while deep water reserves and other more expensive production (like the North Sea), will lose out. US shale production used to be in the middle of the cost curve but is now on the lower end. More investment is forecasted to flow into the sector.


FINSUM: This is interesting news. It seems good for the US economy, but it is not particularly good news for oil prices overall. The better US shale cuts costs, the more oil production there will be, which means prices will stay low. On the flipside, companies may remain viable.

Source: Financial Times

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