This is a unique response to a rate action by the ECB that cut interest rates to a historical low at 1%, a 25 basis-point drop.
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Except for oil, most sensitive commodity prices have risen only slightly after years of decline, the dollar remains strong, real short-term interest rates are near historical norms, and productivity growth has accelerated in recent quarters.
But to get the trade-off between 10-year government bond, not in America, but on a global basis, and the inverse of the PE or the earnings yield back to historical norms, long-term interest rates would have to fully double from here globally.
Get government spending and deficits back under control and get interest rates back to the historical norm of about 5% as quickly as possible.
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At a time when interest rates were at a historical low and many borrowers had excellent credit ratings, these borrowers would have been much better served with a traditional 15 or 30 year mortgage.
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Whether the economy returns to full capacity and interest rates rise to their historical averages, or we muddle through in a low growth scenario like Japan has done for over a decade, we believe our selection of managers has the skill to be able to navigate the markets.
Interest rates WILL revert back to their historical norms in the future.
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The bottom line: PE should be seen in relation to the level and the direction of interest rates rather than in relation to its historical level.
One such index, as calculated by Goldman Sachs, shows that even after the Fed's cut in interest rates last autumn, monetary conditions are, by historical standards, far from lax.
With the Bank of England's bank rate still at a historical low of 0.5%, the BSA warned that interest rates were so low that this year savers might take more money out of their savings accounts than they put in.
The historical economic perspective we should refer to is Japan, which despite low interest rates caused by types of quantitative easing, has failed to grow in over a decade.
The combination of a zero interest rates policy and quantitative easing is what has pushed government bond yields to historical lows.
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