Mauldin on ZIRP

In his latest "Thoughts from the Frontline," John Mauldin berates the Fed and their intentions of keeping rates at or around zero for quite sometime.  While laying into the Fed he does bring up an interesting point that cannot be forgotten. 

There is no question in my mind that many of my friends in the hedge fund and investment world will see an extended zero interest rate policy as a gift horse. If you tell a rational investor that he or she will be able to borrow money at very low rates for four or five years, then you are inviting all manner of financial transactions to take advantage of low borrowing rates. If, as an investor, you can borrow at 3% and get a 6% return, then a modest four times leverage gets you a 12% return on your capital. The financial engineering made possible by guaranteed low rates is really rather staggering. Whole books could be (and probably are being) written about all the ways to take advantage of such an environment. But also, the overall return from risk assets will be reduced as investors look to create carry trades and leverage up. So the very policy of encouraging investors to move out the risk curve in fact reduces the returns on the risks taken, especially for the average investor who can't take advantage of the financial engineering available to sophisticated investors. Wall Street makes a bundle, and Main Street gets stuck with higher risks and lower returns.

Keep investing in solid financial companies and the larger the better.

Read the whole article here.