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An Examination of the Structural Decline in Rates and its Investment Implications

Boats Against the Current

Jason Thomas
Jason Thomas
Director of Research

Over the past decade, countless investors have waited anxiously for interest rates to rebound to a more "normal" range. Nearly every year since the Global Financial Crisis brought some ostensible sign of "overheating" that one or another analyst would cite as evidence of a looming spike in bond yields. And, in each case, the threat was overblown, inflation failed to accelerate, and long-term yields touched fresh lows, inflicting painful losses on portfolios positioned for the "inevitable" rise in interest rates.?

Perhaps the most recent collapse in bond yields (Figure 1) will finally silence the clarions of interest rate "normalization." At this point, it seems a stretch to insist that low rates are a temporary phenomenon linked to "market technicals" or imprudent central bankers. Something fundamental has changed.

Inflection points of this sort are not easily accepted. Investors have a tendency to search for the future in the past. The dates of past cycles are used to predict the timing of future downturns. Interest rates, equity valuations, property yields, and exchange rates are benchmarked against past values rather than mapped against their fundamental determinants. Worst of all, past relationships can become so entrenched in investors’ minds that flexible, adaptive thinking gets mistaken for the credulity of the na?f claiming "this time is different!"

In retrospect, it seems that investors’ fascination with the exotic policies embraced by central banks—quantitative easing, negative interest rates, forward guidance, and yield curve control—helped foment the misperception that record low interest rates were unnatural or unwarranted. The creeping "Japanization" evident in Europe and even the U.S. went largely unnoticed, as analysts instead warned of "financial repression."1 As it turns out, unconventional monetary tools were not dangerous so much as ineffectual; rates have not been "repressed" by policy but depressed by the combined real effects of demographics, technology and rising corporate savings.

…rates have not been?
“repressed” by policy?
but depressed by the
combined real effects?
of demographics,?
technology and rising?
corporate savings.

Rather than waste more time and money worrying about the specter of rising rates, investors should recognize that the drivers of the current malaise show few signs of abating—let alone reversing—any time soon. Relative to past experience, this new underlying reality has three distinctive features.?


Persistent Decline in Long-Term Bond Yields2

Fig 1

First, the paradox of slow growth and high valuations is likely to be with us for some time to come. This is not to say that volatility will be dampened; recent evidence suggests that the volatility of volatility has actually increased, with markets seemingly more prone to larger sell-offs and swift rebounds. But the superabundance of savings3 will ensure that valuations remain above historical averages across virtually all asset classes. While this realization may spur a taste for adventure on the part of some asset allocators, it is important to remember that the fair value of worthless assets remains zero.?

Second, there looks to be far more fiscal space in advanced economies than one would have supposed a decade ago. Far from facing "crushing" debt burdens, as is commonly depicted, governments in Europe, Japan, and the U.S. have never had an easier time funding new deficits or refinancing their existing stock of debt. Just as a $1 million mortgage may not look quite as daunting to a homebuyer when it carries a 0.5% instead of 5% interest rate, public debt burdens look surprisingly manageable at today’s rates, raising the possibility of more supportive future fiscal policy than previously supposed, especially in Europe.

Third, with equilibrium or market-clearing interest rates firmly in negative territory (net of inflation), the choice will not be whether to assume risk, but at what price and in which dimension. Investors will need to become more sensitized to differences in risk premia across the capital structure. It is not enough to like a given company, property, or industry; a larger share of future returns may come from the exploitation of arbitrage relations between (relatively rich) operating yields and (relatively cheap) financing costs, or vice versa, in those specific industries or regions.

Things aren’t bad so much as different. Governments’ capacity to respond to a slowdown through monetary policy has largely vanished but fiscal space has increased. Expected returns have fallen but the risk of a sharp decline in valuations has ebbed. In some cases, the cost of borrowing has declined by far more than the yield on the assets, leaving net returns unchanged. Navigating this future requires a forward-looking orientation that leaves the past in the past and appreciates why we are where we are.

It’s Savings & Investment, Not Central Banks…?

Central banks set the short-term risk-free rate of interest for their currency, but they do not do so in a vacuum.? Economic fundamentals dictate the appropriate stance for policy, with independent central banks pushed into an inherently reactive posture. The question for policymakers is not where rates sit relative to historical experience, but where they are in relation to "equilibrium" levels that clear the markets for savings and investment.4

Imagine if a wealthy, but aged suburban community constituted its own self-contained economy. If everyone wished to lend (save) and no one wanted to borrow (invest), the community-wide interest rate would very quickly converge to zero. If there were some cost to storing household savings in otherwise risk-free accounts, the market-clearing interest rate might even be negative. This roughly describes the situation in Japan, Germany, Switzerland and many other advanced economies today, with desired savings far exceeding investment demand at historic rates of interest. In these cases, it is not that savers have been mistreated by central banks but that their savings has become superfluous.?

The observed increase in desired savings relative to investment demand has depressed market-clearing real interest rates by nearly 500 basis points, on average, over the past 30 years.5 (When adding the decline in trend inflation, the overall drop in average nominal rates has been closer to 600 basis points.) The decline has been especially pronounced over the past decade, when savings has grown twice as fast as investment as a share of advanced economies’ GDP (Figure 2).?


Savings Rises Twice as Fast as Investment Since the Crisis6

Fig 2

While desired savings has been on a clear upswing since the early 2000s, the emergence of housing bubbles in the United States and peripheral Europe (Ireland, Spain, Portugal, etc.) generated a boom in residential investment that temporarily disguised these new realities (Figure 3). Once these bubbles burst in the Global Financial Crisis, economy-wide investment demand settled down at levels consistent with negative cyclically-adjusted real interest rates, with the fastest growth in (desired) gross savings and slowest net growth in the capital stock (current-cost physical assets plus intellectual property) in recorded history.7


Investment Rises Temporarily on the Back of Housing Bubbles8

Fig 3


U.S. Real Rates Closely Track Savings-Investment Relations9

Fig 4

These conclusions are not conjectural or subject to significant model uncertainty. Savings-investment relations have a remarkably good track record forecasting "equilibrium" real interest rates over the past 50 years (Figure 4 and 5). Periods where observed real rates deviated from equilibrium levels have coincided with policy errors or sharp adjustments in inflation (Figure 6).?

These data suggest that real interest rates in the U.S. may now be expected to peak at 0.5% (a 2.3% fed funds rate at current average inflation) and trough at levels (between -2% to -3%) where standard policy tools are not likely to stimulate the economy. For Europe and Japan, equilibrium real rates look to be roughly 100bp to 200bp lower, further complicating policymakers’ ability to deliver real rates low enough to stimulate spending and investment.?


Decline in Equilibrium Interest Rates in Europe10

Fig 5


Past Deviations from Fundamentals Have Coincided with Policy Errors, Sharp Shifts in Inflation Trends 11

Fig 6


…Caused by Changes in Demographics, Technology & Business Models

What’s caused desired savings to rise relative to investment demand? The first and most obvious driver is demographic change: the slowing growth in the labor force, the aging of the population, and a degree of satiation among aging and relatively wealthy consumers who’ve already made most of their big-ticket purchases.

Nothing tells this story quite like Figure 7, which plots the annualized growth of personal consumption expenditures against the lagged 10-year growth in the labor force. The growth of the population in their prime earning years reliably predicts the subsequent growth in consumption outlays. Economy-wide savings naturally rises as more households prepare for retirement and those retirements tend to last much longer than in prior generations.12 Slower growth in the number of prime-age consumers also depresses durable goods consumption; purchases of net new (i.e. first-time) cars, homes, computers, and smartphones drop sharply as the median age in an economy rises from 30 to 50 (Figure 8).13


Consumption Growth Tracks Demographic Trends14

Fig 7


High Median Ages Depress Durable Goods Purchases in Advanced Economies15?

Fig 8

Slowing demand growth creates a sense of overcapacity among durable goods manufacturers that causes pullbacks in fixed investment, further depressing real interest rates.16This trend was first observed in Japan in the mid-1990s. Rather than reinvest profits to expand operations, Japanese corporations instead built enormous cash balances (Figure 9; top). Once viewed as an oddity related to Japanese-specific structural challenges, the corporate sector in the rest of the G-7 soon followed suit, with corporate investment falling by 25% since 1990 even as corporate savings (retained earnings) increased by 22% over the same period (Figure 9; bottom).


Corporate Cash Flow Surpluses & Cash Holdings17 ?

Fig 9a

Fig 9b

The rise of corporate cash surpluses also stems from structural shifts in the economy towards intangible assets, value-added services, and more flexible, "asset light" business models that require less external capital. Intangible assets —ideas, content, design platforms, software, proprietary technology, brand, business methods, etc.—now account for over 80% of economy-wide enterprise value, up from just 20% forty years ago (Figure 10). These assets introduce a scalability that allows virtually infinite revenue growth without much, if any, incremental investment. Over the last five years, the 10 largest businesses by market cap generated 2.5x as much cash flow from operations as they reinvested in the business (net of all R&D), resulting in net savings of more than $640 billion for just this subset of businesses.18


Intangible Assets Now Represent Over 80% of Enterprise Value19?

Fig 10

Increases in corporate savings also partly reflect the decline in the relative price of capital goods, especially computing power, data storage and transmission, and related technology. As technology-related capital gets progressively cheaper (Figure 11), a given capex budget buys a progressively larger quantity of IT hardware and services, increasing corporate savings and decreasing investment in proportion to the relative rate of deflation.20 The decline in the relative price of IT also induces businesses to shift away from labor towards capital, including automation and robotics,21particularly during periods of labor shortages or (erstwhile) wage pressures.


Annualized Decline in the Average Price of IT Hardware and Services22

Fig 11

These structural shifts not only increase corporate savings relative to investment, but also make overall investment and hiring less sensitive to interest rates. Past economic cycles were, in part, interest rate cycles. Rate cuts stimulated investment and hiring among firms looking to take advantage of the temporary decline in borrowing costs; rate hikes depressed investment for the same reason. As firms’ capital needs decline relative to income and more investment gets funded out of internally-generated cash flow, corporate investment becomes less responsive to monetary stimulus and the economy is more likely to remain "stuck" in a slow growth equilibrium, with interest rates more likely to remain lower for longer.?

Persistently Low Rates Will Keep Valuations Above Historical Averages

One of the greatest, most oft-repeated misconceptions of the post-crisis period has been the insistence that "bond and stock markets cannot both be right." The idea, gleaned from historical experience, is that high bond prices could not possibly be consistent with high equity valuations because low bond yields reflect concerns about the economy that would inevitably depress the earnings growth on which high equity valuations depend. But, as investors have discovered time and again this decade, there is a difference between a temporary dip in yields due to cyclical growth concerns—such as the effects of the trade war—and a structural decline in interest rates, which pushes up the market value of all assets.? ?

According to the Treasury zero coupon curve, the market value of $100 due in ten years’ time rose from $50 in 2000 to $86 in 2016, a 72% increase in present value (Figure 12). Since Treasury yields provide the base interest rates used to discount all future (dollar-denominated) cash flows, the market value of dividends, rents, coupons, royalties, and all other payments due in ten years eventually increase by roughly the same proportion.?

This effect is borne out in the data. The yields on REITs and dividend stocks closely track those of Treasuries over time (Figure 13) and a similarly tight relationship exists between long-term Treasury yields and broader equity valuations (Figure 14). At current Treasury yields, one would anticipate that equity valuations would remain roughly 25% above historical averages—close to current levels. Any forecast that expects Ebitda multiples to contract by 3x to 4x from recent peaks also requires a narrative explaining why 10-year Treasury yields will rise above 5%.


Present Value of $100 Due in 10 Years23

Fig 12


...the structural decline in rates also reduces the risk of a sharp drop in the valuations of quality assets, opens more fiscal space in advanced economies, and increases the returns to strategies able to exploit the mispricing arising from the preference for safe assets.



Yields on REITs and Stocks Depend on Treasury Yields24
Fig 13


Current Yields Consistent with Equity Valuations ~20-25% Above Long-Run Averages25?

Fig 14

A Rising Tide Does Not Lift All Boats

While investors should anticipate that valuations will remain above historical averages for some time to come, a few caveats are in order. First, an increase in the level of market valuations should not be confused with a decline in market volatility. Indeed, the data suggest that the conditional variation in market volatility—the "volatility of volatility"—seems to be increasing with time, as deep sell-offs tend to be followed quickly by sharp rebounds in asset prices (Figure 15). Part of this could be due to so-called "convexity effects." As discount rates trend towards zero, the price impact of a 50 basis point shift in the cost of capital rises nonlinearly.26 Even with high cyclically-adjusted valuations, investors should continue to anticipate large, sentiment-driven swings in markets that will continue to benefit opportunistic deployment strategies, particularly in credit.27

Second, averages can be misleading. During bull markets, assets tend to carry comparable valuations; in recessions, the cross-sectional dispersion in valuations widens considerably (Figure 16). In downturns, losses are not apportioned on a pro rata basis. As risk aversion increases and investors become more discriminating, the highest quality assets – as defined by stability of sales or rental growth, operating margins, and net cash generation—tend to retain a much larger share of their value.28 High average valuations will not rescue all assets.?


Steady Increase in Conditional Variation in Market Volatility29

Fig 15


Dispersion in Valuations Across Assets Increases During Recessions30?

Fig 16

This is especially true with regard to the recent wave of Initial Public Offerings (IPOs), which include the largest share of unprofitable businesses in history, more than in the 1999-00 bubble (Figure 17). During periods of frustratingly high asset prices, investors often search for assets that offer the promise of exponential growth to compensate for low expected returns elsewhere in the portfolio. Unfortunately, this thinking quickly results in eye-popping valuations (Figure 18) predicated on nonsensical notions about losing money on every transaction but making it up in volume.?


Fewer IPOs Involve Profitable Businesses than Ever Before31

Fig 17


Recent IPOs Out of Touch with Fundamentals & Private Market Valuations32 ?

Fig 18

Low Rates Create More Fiscal Space, Especially in Europe

In an era of persistently low interest rates and high valuations, fiscal deficits will prove much easier to finance than previously supposed.33 Despite clamorous public expressions of consternation about "crippling" debt loads, the actual burden of financing public debt—the share of GDP devoted to net interest payments—remains at or near historic lows in Japan, Europe and the U.S. Even more auspiciously, current market pricing suggests that debt-to-GDP ratios in advanced economies will actually fall over time, as the growth rate of the economy (low, but positive in real terms) exceeds the average effective interest rate paid on the debt (negative in real terms).34

Historically, deficits were thought to increase future tax burdens, displace other public spending, and crowd out private capital by soaking up savings that would have otherwise gone towards productive investment. But in a world where desired savings exceeds investment demand, there is no crowding out. Private sector savings has already fully funded private investment; the remaining surplus could either be invested abroad, widening the current account surplus, or invested in domestic government bonds to fund programmatic expenditures or public investment.?

Rising debt burdens were also thought to increase interest rates, triggering a fiscal death spiral, as investors demanded additional compensation for the risk unsustainable debts would be "inflated away" by central banks. Instead, interest rates and inflation risk premia have steadily declined even as the stock of debt has ballooned. It is a testament to how ingrained the old orthodoxy has become that anyone could worry about the fiscal position of entities able to borrow for 30 years or more at negative real rates.


Net Interest Expense Stable Even as Large Surpluses have Shifted into Massive Deficits35

Fig 19

Of the major economies’, the fiscal position of the U.S. may be most attuned to these new realities. There doesn’t look to be much, if any, space for more easing, but the current trajectory may be more sustainable than many appreciate. Viewed through the lens of history, annual U.S. fiscal deficits of $1 trillion (4.2% of GDP) at full employment in peacetime look hugely irresponsible. But inflation remains stubbornly below target, funding liquidity conditions for businesses are robust as ever, and the share of GDP devoted to debt service remains at roughly the same level as in 2000 despite a near tripling of public debt over this period (Figure 19). ?

The budget standoff between Italy and the European Union (EU) perhaps best highlights the disconnect between historical understandings and current circumstances. When the Maastricht Treaty was agreed in 1992, the economies that eventually adopted the euro spent 4.5% of their combined GDP on net interest payments. Last year, net interest costs were 65% lower (just 1.5% of GDP) despite a combined public debt level that was 20% higher (85% of GDP compared to 70% in 1992). And these debt service costs are set to decline further in the years ahead as the high-yielding long-term debt issued in the 1990s matures and gets refinanced by new, lower cost borrowing.36

These figures are not skewed by Germany; finance costs have declined uniformly across Europe. In 1992, Italy spent over 11% of national income servicing its debt. Last year, debt service costs amounted to just 3.5% of Italian GDP (a 68% decline) even though gross public debt had grown by 20% to 132% of GDP (Figure 20). In 1992, a government with debt service costs as low as Italy’s today would have been a paragon of fiscal virtue, not the reprobate depicted by Brussels.?


What Italian Public Debt Crisis?37

Fig 20

While the EU’s confrontation with Rome is difficult to handicap because it involves much more than fiscal policy, Europe will eventually recognize the wisdom of adopting a more supportive fiscal stance. A policy mix of balanced budgets and negative nominal interest rates fetishizes fiscal austerity at the expense of economic outcomes and political stability. A package of tax cuts and infrastructure spending would boost public investment, soak up excess private savings, and place upward pressure on equilibrium interest rates and inflation expectations.?

Even Japan—long considered the most obvious candidate for a fiscal Armageddon—spends less of its GDP on net interest expense today than was the case 30 years ago (Figure 21). Japan has even stabilized its debt to GDP ratio, as nominal GDP growth finally exceeds the effective interest rate paid on its debt. With the savings of Japanese households and businesses far exceeding actionable domestic investment opportunities, the government of Japan has become a borrower of last resort, providing an outlet for excess savings that gets recycled into the economy through public investment. Periodic consumption tax increases look to be all that’s necessary to keep debt ratios stable indefinitely.


Japan Debt Service Costs Lower Today than in 1990s Despite Gross Debt in Excess of 230% of GDP38 ?

Fig 21

With Negative Real Rates, the Question is Not Whether to Take Risk, But How?

With equilibrium or market-clearing interest rates firmly in negative territory across the developed world (net of inflation), the choice for portfolio managers will not be whether to assume risk, but at what price and in which dimension. Historical returns provide no guide to the prospective performance of traditional portfolio allocations given the sharp decline in bond yields and their corresponding impact on equity and real estate valuations.?

Nothing concentrates investors’ minds in this regard quite like negative nominal interest rates. Though hardly different conceptually from negative real rates in that an investor receives a stream of payments of lesser value than the purchase price of the asset, an outright monetary loss is more salient and disturbing. Many investors’ reactions to the onset of negative rates seemed to follow the familiar stages of grief: Denial that this could really be happening. Anger at the central banks purportedly responsible for the "financial repression." Bargaining about ways to evade this new set of circumstances. Depression regarding the impact on portfolio-wide returns. And now, finally, has come time for acceptance.

The news is not all bad. The market-clearing risk-free interest rate has moved so firmly into negative territory (net of inflation) partly because the increase in desired savings has been closely associated with an increase in the demand for safe assets.39 It is not simply that available savings has increased, but a larger share of the marginal dollar of savings seeks safety and liquidity.?

High savings rates seem to go hand-in-hand with more conservative portfolios, whether viewed at the individual economy, household, or business level. Households in economies with the largest net savings rates—as measured by current account surpluses and net foreign asset positions—tend to be more risk averse, with equities accounting for just 11% of portfolios, on average, in Japan, Germany, Korea, and Switzerland relative to 34% in the U.S.40 Institutional portfolios tend to mirror household preferences in those economies, while more global capital pools have become focused on the "hedge" properties of sovereign bonds given their strong performance during periods of market stress. Risk parity strategies further increase demand for safe assets through leverage.41

Similarly, the increase in corporate savings has been closely associated with an increase in corporate cash holdings.42 It is not simply that retained earnings have increased relative to capex, but those retained earnings have been channeled into enormous cash hoards, which, in practice, bid up the price of high-grade sovereign and corporate bills and bonds, further depressing their yields.

As the issuers of "risk-free" assets thanks to their taxing authority and central bank backstop, governments in advanced economies are the primary beneficiaries of this shift, as evidenced by the roughly $13 trillion in government bonds priced at negative yields.43 But there’s a flip side to this phenomenon: the increase in relative demand for safe assets has also caused their yields to decline by twice as much as the average, economy-wide return on capital (Figure 22). Safe assets have absorbed most of the decline in total returns; risk premia have actually widened.44?

So while the decline in real interest rates would imply 400bp to 500bp of drag on the returns of the typical portfolio, its practical effect could be mitigated by a willingness to accept greater subordination, whether in terms of liquidity, credit, or market risks. Even more consequentially, the preference for safety creates capital structure arbitrage opportunities, where the senior pieces of the credit stack can become "expensive" relative to the equity.?

As the first to fall into the slow growth, negative rate equilibrium, the experience of Japan may be instructive in this regard. The preference for safe assets has meant that the (risk-adjusted) return to subordination has been good, but returns to strategies that actively exploit the arbitrage created by the preference for safety have been great. ?


Treasury Yields Fall More than Real Return on Capital45

Fig 22

Over the past decade, average stock returns in Japan have exceeded bill yields by nearly 7%,46 reinforcing the notion that safe assets have absorbed most of the decline in economy-wide returns. But passive stock investments have failed to more fully exploit the mispricing because Japanese businesses have exhibited the same preference for safety and liquidity as Japanese households and institutional investors. Six out of 10 publicly traded companies in Japan are effectively debt free, with cash holdings equal to or greater than their debt outstanding47 despite the fact that investment grade loan rates are close to zero and those on leveraged loans average between 1.5% and 1.75%.48

Strategies that take a control position in the businesses construct an arbitrage portfolio that is effectively "long" the company’s assets and "short" the debt issued against them. While theoretically equivalent on a risk-adjusted basis,49 a preference for safety can cause the yield on debt to fall more than proportionately to the yield on assets. As shown in Figure 23, when this occurs, the cash return to the equity can increase substantially relative to more "normal" circumstances, as 1.75% debt finances assets with 12% Ebitda yields.


Cash Returns to Equity in Japan 3x Those in the U.S.50

Fig 23

The point is not that investors should assume more risk or simply leverage portfolio holdings. In a world of depressed returns, where every basis point matters, a larger share of total returns will come from the shrewd exploitation of spreads and the collection of premiums paid to those willing to bear illiquidity, credit, and macroeconomic risks. The Japanese example illustrates that the drop in the equilibrium return on savings is not a death sentence for investors, but a warning about the costs and consequences of inattention to changed circumstances.

Not Bad But Different?

History teaches investors to think in terms of cycles, but not every phenomenon is cyclical in nature. Structural breaks occur, forcing observers to delineate, in real time, between changes that represent temporary departures from the familiar and those that are of a more permanent character. ?

The cumulative evidence from the past decade indicates that the decline in real interest rates stems from factors—demographics, technology, and changed business models—that show few signs of abating, let alone reversing, any time soon. While the structural decline in rates exerts downward pressure on expected returns, it also reduces the risk of a sharp drop in the valuations of quality assets, opens more fiscal space in advanced economies, and actually increases the absolute and relative returns to strategies able to exploit the mispricing arising from the preference for safe assets.

The current investment environment is not uniformly bad but it is different. It is time for investors to let go of the past and recalibrate expectations for valuations, growth rates, and expected returns on the basis of contemporary realities rather than historical memories.?


Jason M. Thomas is a Managing Director and the Director of Research at The Carlyle Group, focusing on economic and statistical analysis of the Carlyle portfolio, asset prices, and broader trends in the global economy. He is based in Washington, D.C.

Mr. Thomas serves as the economic adviser to the firm’s corporate private equity and real estate investment committees. His research helps to identify new investment opportunities, advance strategic initiatives and corporate development, and support Carlyle investors.

Previous to joining Carlyle, Mr. Thomas was Vice President, Research at the Private Equity Council. Prior to that, he served on the White House staff as Special Assistant to the President and Director for Policy Development at the National Economic Council. In this capacity, he served as the primary adviser to the President for public finance.

Mr. Thomas received a B.A. from Claremont McKenna College and an M.S. and Ph.D. in finance from George Washington University where he studied as a Bank of America Foundation, Leo and Lillian Goodwin Foundation, and School of Business Fellow.

He has earned the Chartered Financial Analyst (CFA) designation and is a financial risk manager (FRM) certified by the Global Association of Risk Professionals.

Contact Information
Jason Thomas
Director of Research
[email protected]
(202) 729-5420

  • 1. Between 2011 and 2019, more than 1,350 articles in the Financial Times, Wall Street Journal, and NY Times appeared that used the phrase "financial repression" to describe or explain the decline in interest rates.
  • 2. Bloomberg, August 20, 2019.
  • 3. Defined as income net of consumption in advanced economies across the corporate, household, and public sectors.
  • 4. Savings is the sum of income in excess of consumption, tax revenues, and retained corporate earnings, while investment is the sum of public and private spending on capital goods, equipment, construction, and intellectual property. The real (i.e. inflation-adjusted) return on cash (short-term bills or loans) is the variable that clears savings (lending) and investment (borrowing) markets, and the expected path of the cash rate is the primary determinant of longer-run interest rates.
  • 5. Are Low Real Interest Rates Here to Stay? September 2017 issue of the International Journal of Central Banking
  • 6. IMF WEO Database, April 2019.
  • 7. BEA, Fixed Assets, 2019. IMF, 2019 WEO Database.
  • 8. IMF WEO Database, OECD Database, April 2019.
  • 9. Carlyle; Organization for Economic Co-Operation and Development; U.S. Bureau of Labor Statistics; U.S. Bureau of Economic Analysis; IMF WEO Database, July 2019.
  • 10. IMF WEO Database, April 2019.
  • 11. Carlyle; Organization for Economic Co-Operation and Development; U.S. Bureau of Labor Statistics; U.S. Bureau of Economic Analysis; IMF WEO Database, July 2019.
  • 12. Carvalho, C.? (2016), "Demographics and Real Interest Rates: Inspecting the Mechanism," Federal Reserve Bank of San Francisco.
  • 13. National Highway Administration, Census Bureau, and NY Times, May 3, 2011 (ownership of TV sets).Carlyle Analysis of World Health Organization data on car registrations and median age by country, Global Health Observatory, 2019.
  • 14. Carlyle, U.S. Bureau of Labor Statistics, U.S. Bureau of Economic Analysis, August 2019.
  • 15. Carlyle Analysis; World Health Organization, August 2018.
  • 16. Carvalho (2016).
  • 17. The Rise in Corporate Saving and Cash Holding in Advanced Economies: Aggregate and Firm Level Trends, IMF Working Paper 18/262.
  • 18. "Thinking Beyond the Cycle," The Carlyle Group, May 2019.
  • 19. Bloomberg, Ocean Tomo, April 2018.
  • 20. At 9% annualized deflation, $100 of current period cash flows are sufficient to buy $109 of IT equipment.? Alternatively, the company can replace the same amount of IT capital with just $91 of current period cash flow, increasing corporate savings and reducing corporate investment by 9%, holding other factors constant.
  • 21. Karabarbounis. L. and B. Neiman. (2013), "The Global Decline of the Labor Share," NBER Working Papers 19136.
  • 22. Bureau of Labor Statistics
  • 23. U.S. Treasury Department, Zero Coupon Prices.
  • 24. CRSP, Federal Reserve Board of Governors, H.15 Selected Interest Rates, FTSE NAREIT, August 2019.
  • 25. Carlyle Analysis; Aswath Damodaran, Stern School, NYU.
  • 26. The price impact of a 50bp increase in rates is 3.67x greater when a given cash flow is capitalized at a 1% rate rather than a 5% rate, for example.
  • 27. Cf. "Credit in Downturns," The Carlyle Group, January 2019.
  • 28. Harvey, C. et al.? (2019), "The Best of Strategies for the Worst of Times: Can Portfolios be Crisis Proofed?" Duke University Working Paper.
  • 29. Carlyle Analysis of CBOE Data, August 2019.
  • 30. Carlyle Analysis, Center for Research in Security Prices, August 2018.
  • 31. Carlyle; Jay R. Ritter, University of Florida: IPO Updated Statistics December 31, 2018.; S&P Capital IQ IPO Data, July 2019.
  • 32. S&P Capital IQ and S&P LCD.? Data as of the end of Q2 2019.
  • 33. Blanchard, O.? (2019), "Public Debt and Low Interest Rates," American Economic Review.
  • 34. "Preparing for Uncertainty," Breugel, July 2019.
  • 35. IMF WEO Database, April 2019.
  • 36. IMF, 2019 WEO Database.? IMF, 2019 Fiscal Monitor Database.
  • 37. IMF WEO Database, April 2019.
  • 38. IMF WEO Database, April 2019.
  • 39. Caballero, R.J., E. Farhi, and P.O. Gourinchas. (2017), "The Safe Asset Shortage Conundrum." Journal of Economic Perspectives.
  • 40. OECD National Accounts Statistics, Accessed August 2019.
  • 41. The Rise in Risk Parity Strategies, Pensions & Investments, June 2019.
  • 42. Dao, Mai Chi, Maggi,Chiara (2018), "The Rise in Corporate Saving and Cash Holding in Advanced Economies: Aggregate and Firm Level Trends," IMF Working Paper 18/262.
  • 43. Market values in excess of the sum of all promised principal and coupon payments, Bloomberg, August 22, 2019.
  • 44. Marx, M. et al.? (2019). "Why Have Interest Rates Fallen Far Below the Return on Capital," BIS Working Paper No. 794
  • 45. IMF WEO Database, Federal Reserve H.15, April 2019.
  • 46. Bloomberg, August 22, 2019.
  • 47. Nikkei Asian Review, June 26, 2018.
  • 48. Average of observed market transactions, 2017-2019.
  • 49. Per Modigliani-Miller (1958, 1963, and 1977).
  • 50. Carlyle, S&P Capital IQ, S&P LCD LBO 2018 Q4 Report.? Presented for illustrative purposes only.? Example assumes a 60/40 debt/equity split., 1.75% LBO interest rate for Japan, and 6.9% LBO interest rate for the U.S.
Economic and market views and forecasts reflect our judgment as of the date of this presentation and are subject to change without notice. In particular, forecasts are estimated, based on assumptions, and may change materially as economic and market conditions change. The Carlyle Group has no obligation to provide updates or changes to these forecasts.

Certain information contained herein has been obtained from sources prepared by other parties, which in certain cases have not been updated through the date hereof. While such information is believed to be reliable for the purpose used herein, The Carlyle Group and its affiliates assume no responsibility for the accuracy, completeness or fairness of such information.
References to particular portfolio companies are not intended as, and should not be construed as, recommendations for any particular company, investment, or security. The investments described herein were not made by a single investment fund or other product and do not represent all of the investments purchased or sold by any fund or product.

This material should not be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. We are not soliciting any action based on this material. It is for the general information of clients of The Carlyle Group. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual investors.
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