While all of the talk about QE programs is about their ‘stimulative effect’ on financial risk assets, there are a key group that are negatively impacted by artificially low interest rates; savers.  In Japan this can be seen in the massive life insurance industry.  The Bank of Japan’s (BOJ) buying of huge amounts of Japanese government bonds has pushed long-term interest rates to unprecedented lows. This has made it impossible for insurance companies to generate sufficient returns on bond investments to pay benefits to policyholders which, in turn, is forcing life insurance companies to raise premiums on lump-sum whole life policies and causing others to consider halting sales of such products altogether.  The policy has become much like ‘pushing on a string’, with loan margins already crushed by ultralow interest rates.  The bottom line is that central bankers everywhere are getting investors ‘addicted’ to a period of excessively low interest rates.  Rather than reforming economies and getting them to grow naturally, we are relying on the artificial impact of low interest rates to drive up asset prices in the hope that this wealth filters back into the general economy.   While the first part of the process seems to be happening, there has been very little success in parlaying that wealth into improved growth, either through consumers or corporations.  In the meantime, central banks continue to grow their debts to unprecedented levels.  It doesn’t seem to take too much imagination to see this as a recipe for total disaster in financial markets at some point.

For now there remains too much risk for us to have any sort of aggressive investment strategy.  We are finding value in income-generating investments such as Canadian REITS, preferred shares and some high-yielding common stocks such as banks.  Resource stocks are probably closer to a bottom given they have fallen so sharply, particularly over the past six months, and any pullback in the U.S. dollar could lead to a ‘bounce’ in oil prices.  Gold already appears to have found a bottom and has been rising on global currency devaluation.   However, global economic growth remains challenged and we see commensurate risk in corporate earnings, and therefore stock prices.

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