ultra low / negative interest rates in Germany

[dualstow]

I never thought about switching from long-term treasurys to shorter ones before, but if it really gets to the point where I need to abandon my 30-year's, I suppose I would move to 7- or 10-year notes.  I wish Harry were alive to comment on this situation.

As for corporate bonds, yes it's true that Harry mentioned in his radio show that you could buy them in lieu of treasuries if you have moral concerns -- we all know how moral Exxon Mobil and Goldman Sachs are. However, I only own those in my Vp and I think I'll keep it that way. (VCIT, mid-term corp bond etf).

[craigr]

I was thinking of replacing the bonds with more of the other elements for the time being (stocks, gold, cash 33% each).

That's a possibility and I've thought about that as one option if U.S. bonds do the same. It won't be as good in deflation, but if bonds are paying 1% anyway, then most of the juice is gone from that asset.

My (Christian) family wanted to help this guy but we terminated the contact as soon as we heard about his criminal activities.
The other one is a very nice person, also from Libya.

Please don't let them do this. They don't know what the real story is, who these "refugees" are speaking with, or what they may do if they get desperate. Stay safe:

http://www.dailymail.co.uk/news/article ... -girl.html

Maybe ask your family if their assistance enabled these people to stay in the country and participate in the sex assaults on New Years? Or maybe someone is going to be robbed, raped, or assaulted by these people that they helped? Is it Christian to enable your enemies to invade your country and attack the countrymen?

I would personally be working with groups to roll out the Unwelcome Mat and not offer any assistance to them whatsoever.

You will always be a net drain on society. Of course, we don't want to kick them out either, with Islamic State taking hold around the town of Sirte.

There are plenty of Muslim countries that are safe that these rapefugees can go to instead. Europe can't adopt the entire African continent and remain Europe. Pathological altruism is going to be the ruin of Western countries.

It just gets back to one of my core beliefs that people, culture and investing cannot be separated. People are not interchangeable cogs in an economy.

If the people and culture goes bad, then the investment will go bad along with the country. Germany needs to get it together and get some people in there that can take action necessary to preserve their way of life. Low bond rates are going to be the least of their worries if things don't change.

[Libertarian666]

Thanks for all the comments and ideas.

On corporate bonds, I am not so sure this is a good idea. Bond market history is littered with clusters of defaults.

We study corporate bond default rates using an extensive new data set spanning the 1866–2008 period.
We find that the corporate bond market has repeatedly suffered clustered default events much worse
than those experienced during the Great Depression. For example, during the railroad crisis of 1873–1875,
total defaults amounted to 36 percent of the par value of the entire corporate bond market.
Source: http://www.nber.org/papers/w15848.pdf (an interesting read by the way)

If you have bad luck and you're going to hit that water vein of amassed corporate bond defaults, which implies that the stock markets will also be in dire straits, you gonna destroy your portfolio. Replace railroad crisis with oil price crisis.... 

------
The refugee situation has actually become untenable in Germany.
I can speak of Berlin only, but there are spots emerging where crime is rampant and at night it's like police has been disestablished (RAW Gelände, Görlitzer Park, Kottbusser Tor...). Not John Carpenter's Escape From New York-style yet, but moving in that direction. Migrant gangs selling drugs, fighting for supremacy (Arabs vs. Africans etc.) - again it's not yet Bloods vs. Cribs, but it is not business as usual anymore.
I would strongly advise against taking the subway after 11 p.m., especially if you are a woman - you're asking for trouble.

Of course there is a simple, costless way to reduce such a crime problem to a small fraction of its current size.

Too bad the politicians will never consider it and the population is (so far, anyway) too ignorant and/or frightened to make the politicians consider it.

[Libertarian666]

Most of us personally may be harmed in some way should the tide turn against us elite asset owners and capital gains collectors, but ultimately I think it would be good of the country.

I didn't realize I was so honored as to have met one of the "elite asset owners"! You certainly do a good job camouflaging your protected compound as a middle-class residence!

[Pointedstick]

The machine gun turrets are hidden in underground silos.

Most people own no financial assets or practically no financial assets, are extremely cash-poor, and derive most of their net worth, if any, from the value of their home. In retirement most will be completely dependent on social security or a public or private pension for their ongoing expenses. Most of us here are instead working towards or have already achieved some sort of financial independence provided by our investment assets. We are the elite. We're not as elite as, like, Michael Bloomberg or George Soros, but we're still the elite. No sense in denying it. What percentage of the membership of this forum would you guess has a liquid net worth in the 90th percentile for their age? 80%? 90%? 99%?

http://www.fool.com/investing/general/2 ... -comp.aspx

[Libertarian666]

The machine gun turrets are hidden in underground silos.

Most people own no financial assets or practically no financial assets, are extremely cash-poor and derive moth of their net worth, if any, from the value of their home. In retirement most will be completely dependent on social security or a public or private pension for their ongoing expenses. Most of us here are instead working towards or have already achieved some sort of financial independence provided by our investment assets. We are the elite. We're not as elite as, like, Michael Bloomberg or George Soros, but we're still the elite. No sense in denying it. What percentage of the membership of this forum would you guess has a liquid net worth in the 90th percentile for their age? 80%? 90%? 99%?

http://www.fool.com/investing/general/2 ... -comp.aspx

Yes, I knew about the predominant "home equity" portion of "net worth". Personally, even though my "home equity" is theoretically $50K or so, I can't get at it without selling (or remortgaging), so I don't consider it as part of my portfolio.

That aside, I imagine you are right that most of the forum members are way ahead of the average. But as far as our being "the elite", I guess I would consider "the elite" anyone who doesn't have to worry about their standard of living declining after retirement or disability. I'm not in that category, although I'm pretty sure that we won't end up living in a cardboard box.

[lordmetroid]

In times of deflation, indebted corporations may go bankrupt, that was why Harry Browne liked the government bonds because they can always print some more money to pay the bond holders.

[economicsjunkie]

I never thought about switching from long-term treasurys to shorter ones before, but if it really gets to the point where I need to abandon my 30-year's, I suppose I would move to 7- or 10-year notes.  I wish Harry were alive to comment on this situation.

I've seen this suggestion here a couple of times now. If low/negative interest rates are of concern here, then why in the world would a switch to a shorter duration be sensible, where interest rates would be even lower/more negative?!

[ochotona]

I've seen this suggestions here a couple of times now. If low/negative interest rates are of concern here, then why in the world would a switch to a shorter duration be sensible, where interest rates would be even lower/more negative?!

The issue is the risk of changes in the market price of the bond due to interest rate changes.

{picks up HP-12C Financial Calculator}

Let's say you buy a new 30 year Treasury for $10,000, and the coupon rate is 0.5%. The Present Value (PV) of that bond, if the market interest rate is 0.5% is just $10,000. You pay $10,000, you get your 0.5% interest for 30 years, and in 30 years you get your $10,000 back.

If the market interest rate increases to 1.0%, your PV of the bond just fell to $7548.26. You just had a -24.5% change because of a 0.5% change in the interest rate. Your bond has to sell at a discount in order for it to be attractively priced for someone to buy who might just as well buy a new 30 year bond paying 1%, not the old 0.5%.

That's what long bond investors are so freeking scared of.

[economicsjunkie]

I've seen this suggestions here a couple of times now. If low/negative interest rates are of concern here, then why in the world would a switch to a shorter duration be sensible, where interest rates would be even lower/more negative?!

The issue is the risk of changes in the market price of the bond due to interest rate changes.

{picks up HP-12C Financial Calculator}

Let's say you buy a new 30 year Treasury for $10,000, and the coupon rate is 0.5%. The Present Value (PV) of that bond, if the market interest rate is 0.5% is just $10,000. You pay $10,000, you get your 0.5% interest for 30 years, and in 30 years you get your $10,000 back.

If the market interest rate increases to 1.0%, your PV of the bond just fell to $7548.26. You just had a -24.5% change because of a 0.5% change in the interest rate. Your bond has to sell at a discount in order for it to be attractively priced for someone to buy who might just as well buy a new 30 year bond paying 1%, not the old 0.5%.

That's what long bond investors are so freeking scared of.

Correct, the longer the duration the more volatile the bond. And?

[ochotona]

Correct, the longer the duration the more volatile the bond. And?

The answer to your question is people will go to shorter duration in order to lower the volatility, because they may give up a tiny bit of coupon, but they avoid huge capital loss potential. You asked the question.

[dragoncar]

I've seen this suggestions here a couple of times now. If low/negative interest rates are of concern here, then why in the world would a switch to a shorter duration be sensible, where interest rates would be even lower/more negative?!

The issue is the risk of changes in the market price of the bond due to interest rate changes.

{picks up HP-12C Financial Calculator}

Let's say you buy a new 30 year Treasury for $10,000, and the coupon rate is 0.5%. The Present Value (PV) of that bond, if the market interest rate is 0.5% is just $10,000. You pay $10,000, you get your 0.5% interest for 30 years, and in 30 years you get your $10,000 back.

If the market interest rate increases to 1.0%, your PV of the bond just fell to $7548.26. You just had a -24.5% change because of a 0.5% change in the interest rate. Your bond has to sell at a discount in order for it to be attractively priced for someone to buy who might just as well buy a new 30 year bond paying 1%, not the old 0.5%.

That's what long bond investors are so freeking scared of.

So you rebalance into more bonds.  Then the rate drops .5%.  Where are you now?

[lordmetroid]

I've seen this suggestions here a couple of times now. If low/negative interest rates are of concern here, then why in the world would a switch to a shorter duration be sensible, where interest rates would be even lower/more negative?!

The issue is the risk of changes in the market price of the bond due to interest rate changes.

{picks up HP-12C Financial Calculator}

Let's say you buy a new 30 year Treasury for $10,000, and the coupon rate is 0.5%. The Present Value (PV) of that bond, if the market interest rate is 0.5% is just $10,000. You pay $10,000, you get your 0.5% interest for 30 years, and in 30 years you get your $10,000 back.

If the market interest rate increases to 1.0%, your PV of the bond just fell to $7548.26. You just had a -24.5% change because of a 0.5% change in the interest rate. Your bond has to sell at a discount in order for it to be attractively priced for someone to buy who might just as well buy a new 30 year bond paying 1%, not the old 0.5%.

That's what long bond investors are so freeking scared of.

You can argue the same principles for any of the four assets, it all depends on the current economic climate. There will always be one asset that is out of favor for some reason or the other.

With deflation looming on the horizon as the QE and debt bubble is about to pop, I actually look very favorably upon bonds, even with these low interest rates. Because a 0,5% yield will be a heck of a lot better than gold who will depreciate in value thanks to cash becoming more and more scarce and valuable. As well as stocks which may never recover for the next few decades alike Japan because the companies will have a hard time making the bottom line as they need to pay off their debt financed assets that bought at the top of the bubble and not generate any growth.

[Libertarian666]

With deflation looming on the horizon as the QE and debt bubble is about to pop, I actually look very favorably upon bonds, even with these low interest rates. Because a 0,5% yield will be a heck of a lot better than gold who will depreciate in value thanks to cash becoming more and more scarce and valuable. As well as stocks which may never recover for the next few decades alike Japan because the companies will have a hard time making the bottom line as they need to pay off their debt financed assets that bought at the top of the bubble and not generate any growth.

As Ben Bernanke noted some time ago (http://www.federalreserve.gov/boarddocs ... t.htm#fn18), central banks can prevent deflation in any country by printing money. Of course the eventual result of this policy will be the destruction of the currency, but they believe that they can stop in time to prevent that. In my opinion, people are starting to realize that printing money is exactly what the central banks are doing and will continue to do, which is why gold has started to move up recently.

[Lang]

So far central banks have had little luck with preventing deflation...

[Libertarian666]

So far central banks have had little luck with preventing deflation...

Then they just aren't printing fast enough.

Anyway, the whole notion of being frightened by deflation is just political cover for inflation. Deflation is the result of inflation, and counteracts the distortions caused by the inflation so that the pattern of spending and investing is more in line with actual consumer preferences. To prevent this, central banks pile on more inflation, which merely prolongs and worsens the distortions.

[BearBones]

As Ben Bernanke noted some time ago (http://www.federalreserve.gov/boarddocs ... t.htm#fn18), central banks can prevent deflation in any country by printing money. Of course the eventual result of this policy will be the destruction of the currency, but they believe that they can stop in time to prevent that. In my opinion, people are starting to realize that printing money is exactly what the central banks are doing and will continue to do, which is why gold has started to move up recently.

My recollection from past threads is that central banks have a lot more control over inflation than deflation. "Printing money" does no good if there if the economy is stagnant (such as from fear, satiety, or the aging of a population) and the money does not go into circulation. And it does not necessarily result in inflation.

Do I remember correctly?

[economicsjunkie]

Correct, the longer the duration the more volatile the bond. And?

The answer to your question is people will go to shorter duration in order to lower the volatility, because they may give up a tiny bit of coupon, but they avoid huge capital loss potential. You asked the question.

If I understand you correctly you're suggesting that the capital gains upwards are limited when rates are so low, so might as well go for a duration where the downside risk is reduced. Am I understanding you correctly?

[economicsjunkie]

Because a 0,5% yield will be a heck of a lot better than gold who will depreciate in value thanks to cash becoming more and more scarce and valuable.

What historical evidence are you relying on when you say gold will depreciate during deflation? The Great Depression (granted, the gold price was fixed and changed by the government but so what), Great Recession (no price fixing), and Japanese deflation of the 90s off and on through now seem to contradict this theory.

[dualstow]

Whether or not gold will depreciate, it is these low-yield times that make it easy for me to buy it. After all, the argument often goes that gold "just sits there." If my savings were earning 5%, I'd have to think hard about it, but right now my cash is just sitting there.

[ochotona]

Correct, the longer the duration the more volatile the bond. And?

The answer to your question is people will go to shorter duration in order to lower the volatility, because they may give up a tiny bit of coupon, but they avoid huge capital loss potential. You asked the question.

If I understand you correctly you're suggesting that the capital gains upwards are limited when rates are so low, so might as well go for a duration where the downside risk is reduced. Am I understanding you correctly?

I can't speak for others, but for me, there seems to be an asymmetical risk to the downside when you get to tiny positive or negative coupon rates for long duration bonds. Unless you are prepared to sell out of your position very quickly, and you have specific targets for so doing, being long in long bonds as interest rates go negative can only end in tears.

It's like people who piled into stocks in May 2015... no difference. It's greed, and a willing disregard for downside risks.

But if your investment policy is to let the PP's allocation take care of those risks, then I can't really criticize. That's your personal choice. We all make differing calls.

[Libertarian666]

Whether or not gold will depreciate, it is these low-yield times that make it easy for me to buy it. After all, the argument often goes that gold "just sits there." If my savings were earning 5%, I'd have to think hard about it, but right now my cash is just sitting there.

With savings "earning" negative rates, it's really hard to come up with an argument against gold, which pays a big fat 0% (before storage fees, but still...).

[economicsjunkie]

Whether or not gold will depreciate, it is these low-yield times that make it easy for me to buy it. After all, the argument often goes that gold "just sits there." If my savings were earning 5%, I'd have to think hard about it, but right now my cash is just sitting there.

With savings "earning" negative rates, it's really hard to come up with an argument against gold, which pays a big fat 0% (before storage fees, but still...).

The relative cost benefit calculations of rational investors should certainly favor gold the more these ultra low rates approach gold's yield (0% lol), and at a dose dependent rate one would think. This is why I tend to believe that deflation can be a huge push for gold prices. We'll probably see the answer unravel before us over the coming years.

[ochotona]

The relative cost benefit calculations of rational investors should certainly favor gold the more these ultra low rates approach gold's yield (0% lol), and at a dose dependent rate one would think. This is why I tend to believe that deflation can be a huge push for gold prices. We'll probably see the answer unravel before us over the coming years.

Yes, maybe the value of gold is a concave-upward parabolic curve, with the ends anchored in inflation and deflation. But we have only thought of it as an inflation-anchored sloping line, because deflation has been pretty rare...

[BearBones]

Whether or not gold will depreciate, it is these low-yield times that make it easy for me to buy it. After all, the argument often goes that gold "just sits there." If my savings were earning 5%, I'd have to think hard about it, but right now my cash is just sitting there.

With savings "earning" negative rates, it's really hard to come up with an argument against gold, which pays a big fat 0% (before storage fees, but still...).

It has and always will pay 0%. Only benefit is its value vs the currency, right? You two are betting that gold increases (again) rather than decreases in a severe and/or sustained deflationary environment. It may. Or it could be that its price has been severely inflated by central banks' sustained policies of low interest (the world has been pushed out of cash and bonds so as to ignite growth and prop up otherwise sick economies), and it will drop in value just like real estate, equities and virtually everything else we own.