Negative interest rates

Discussion of the Bond portion of the Permanent Portfolio

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doodle
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Negative interest rates

Post by doodle » Thu Mar 05, 2020 8:45 pm

Looking more and more likely as US interest rates get arbitraged to zero in a world that has essentially embraced negative yields. I think we might soon be in uncharted territory. I'm not quite sure how to react but paying to lend money to someone sounds like lunacy to me. Repercussions seem like they would positively affect real assets and stocks but probability of malinvestment very high. Once we get to negative yields I think permanent portfolio needs to be reexamined.
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Tortoise
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Re: Negative interest rates

Post by Tortoise » Thu Mar 05, 2020 9:34 pm

Okay, let’s reexamine it.

Alternative portfolio suggestions?
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Kriegsspiel
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Re: Negative interest rates

Post by Kriegsspiel » Fri Mar 06, 2020 8:22 am

In the discussion so far, we have considered the world economy as a single
unit. The dynamics between net safe asset producers and safe asset absorbers adds
substantial richness to the picture. In an open economy, the scarcity of safe assets
in one country spreads to others via capital outflows, until safe rates are equalized across countries. As the global scarcity of safe assets intensifies, the global
safe interest rate drops and capital flows increase to restore equilibrium in global
and local safe asset markets. Once the zero lower bound for global interest rates
is reached, global output becomes the adjustment variable. The world economy
enters a regime of increased interdependence, since countries can no longer use
monetary policy to insulate their economies from world capital flows (Caballero
et al. 2015). A country with an acute scarcity of safe assets spreads its recession
to other countries via capital outflows, or equivalently, current account surpluses.
Surplus countries (like the eurozone) are exporting their weak domestic aggregate
demand. Deficit countries, like the United States, are absorbing the weak domestic
aggregate demand of the rest of the world.
The global economy can remain fragile for long periods of time, even if some
countries like the United States and the United Kingdom have managed to largely
erase their output gaps over time, since any intensification in safe asset scarcity in
some countries could lead to the re-emergence of a global safety trap.5
In summary, the world economy seems to have transitioned to an environment
of recurrent global safety traps
link
As is so often the case, I'm reminded of the quote from Lord Keynes:
I sympathize, therefore, with those who would minimize, rather than with those who would maximize, economic entanglement among nations. Ideas, knowledge, science, hospitality, travel--these are the things which should of their nature be international. But let goods be homespun whenever it is reasonably and conveniently possible, and, above all, let finance be primarily national. Yet, at the same time, those who seek to disembarrass a country of its entanglements should be very slow and wary. It should not be a matter of tearing up roots but of slowly training a plant to grow in a different direction.

For these strong reasons, therefore, I am inclined to the belief that, after the transition is accomplished, a greater measure of national self-sufficiency and economic isolation among countries than existed in 1914 may tend to serve the cause of peace, rather than otherwise. At any rate, the age of economic internationalism was not particularly successful in avoiding war; and if its friends retort, that the imperfection of its success never gave it a fair chance, it is reasonable to point out that a greater success is scarcely probable in the coming years.
The recommendations from the MIT paper (not that it's the end-all-be-all, I just happened to have it open in a tab when I saw this post) seem to be in line with Keynes. They're discussing high-level issues, but we can try to distill personal actions out of it.
  • They talk about the paradox of reserve currency. Trump has been on this like a motherfucker. Action: vote Stable Genius in 2020. :P
  • They suggest that the ability of advanced economies to borrow enough to satisfy global demands may become exhausted. They recommend creating tranched debt instruments between countries similar to the MBSs that were destrominated in 2007. When this happened before, as they mention, it was because of the inability to back the debt with gold. Action: hold gold.
  • They talk about how the private sector has an incentive to create safe assets, since the government may not be able to do it enough. Talk of companies withdrawing from risky projects, issuing stable dividends, and buying back their own shares. Action: hold stocks, mostly big stable ones, but with a smattering of smaller ones. Like an SP500 or TSM index.
  • After recommending that central banks hold fewer Treasuries, they go on to say that the demand for Treasuries is insanely high, and will likely remain so into the future. Everybody wants the damn things. Action: hold long term Treasuries.
  • They say that when global pressure on safe assets would cause interest rates to go negative, the balancing mechanism is a global reduction in (paper) wealth, and a recession (inflation?). As has been discussed here before, they seem to imply that the reason other countries can have negative interest rates is that the US doesn't. This is the crux of the matter. Seems fucking complicated. Action: Short term Treasuries, I-bonds, gold, real estate with a mortgage (lol) and other tangible goods. Maybe buy a bunch of stuff on credit cards if the rates go so negative that they pay you to buy stuff. This type of world is silly.
I hated all the things I had toiled for under the sun, because I must leave them to the one who comes after me. Who knows whether that person will be wise or foolish? Yet they will have control over all the fruit of my toil into which I have poured my effort and skill under the sun. . . Nothing is better for a man than to eat and drink and enjoy his work.
- Ecclesiastes
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Xan
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Re: Negative interest rates

Post by Xan » Fri Mar 06, 2020 9:08 am

Kriegsspiel wrote:
Fri Mar 06, 2020 8:22 am
Action: hold gold.
Action: hold stocks
Action: hold long term Treasuries.
Action: Short term Treasuries
Sounds like we're in pretty good shape!
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jhogue
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Re: Negative interest rates

Post by jhogue » Fri Mar 06, 2020 10:09 am

We live in interesting times.

I noticed today that the entire US Treasury yield curve, in real terms, has gone negative.

After the FOMC's decision to reduce overnight rates, it was not really surprising that at the short end, the 3 month T-bill fell to just 0.42%. The long end of the yield curve, however, is where the big surprises keep coming: Today on Fidelity's secondary market, the 30 year T-bond interest rate declined to a mere 1.32%, while the CPI-U has been tracking annualized US inflation at 1.8%-2.0%.

All of the above reminds me that we do not hold Treasurys-- short or long-- for their interest payments. We hold STTs for their safety and stability, or "dry powder" to scoop up other assets when they are cheap. Similarly, we hold LTTs as a "safe haven" and for their upward price volatility when interest rates drop- which we are certainly witnessing now in the credit markets.
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
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dualstow
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Re: Negative interest rates

Post by dualstow » Fri Mar 06, 2020 6:11 pm

Vanguard’s treasury money market (aka #0011, VUSXX) still shows a yield of 1.50%.
And while there is 13% that’s not in T-Bills, it was already like that many weeks ago.
The yield just has to come down this month, doesn’t it?
The new Freakonomics: Why Are Cities (Still) So Expensive? (Ep. 435)
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pugchief
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Re: Negative interest rates

Post by pugchief » Fri Mar 06, 2020 6:51 pm

I'm getting 1.8%+ at several online banks. FDIC insured.

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vnatale
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Re: Negative interest rates

Post by vnatale » Fri Mar 06, 2020 7:05 pm

pugchief wrote:
Fri Mar 06, 2020 6:51 pm
I'm getting 1.8%+ at several online banks. FDIC insured.

CIBC
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Marcus (Goldman Sachs)
You are taking the view that FDIC is equivalent to U. S. Treasuries in terms of government backing, as I believe you've several times stated that.

An alterative view is that there can be greater government backing for U.S. Treasuries than FDIC. Of course, one must also factor in the probabilities of government backing ever occurring. In my lifetime (nearly 7 decades) was it only during the 2008-2009 financial crisis (with extended FDIC coverage for many years after? Still in place?).

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pugchief
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Re: Negative interest rates

Post by pugchief » Fri Mar 06, 2020 7:09 pm

If there is such a severe SHTF situation, who knows if they will even back treasuries? I think FDIC is 'good enough'. YMMV
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Re: Negative interest rates

Post by vnatale » Fri Mar 06, 2020 7:29 pm

pugchief wrote:
Fri Mar 06, 2020 7:09 pm
If there is such a severe SHTF situation, who knows if they will even back treasuries? I think FDIC is 'good enough'. YMMV
Yes. I'm clear on your position. I think that though both could get abandoned in the worst case, FDIC would be the first to be abandoned. Their limits are clearly stated. And, there is only so much in the fund to back them. Treasuries are totally backed by the government. They can always print more money to back them. And, in the extreme print too much money to greatly devalue them. But I'll still place more of a bet on treasuries over FDIC.

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doodle
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Re: Negative interest rates

Post by doodle » Fri Mar 06, 2020 10:10 pm

For the cash portion I think it would be crazy to hold that in a negative interest bearing instrument. Unfortunately not a lot of options other than cash in a mattress??

As for 30 year bonds I understand the volatility component but at a certain point....and I don't know what that is....no amount of economic chaos would have someone purchasing a negatively yielding instrument when cash provides a greater return. Why would someone bid up prices on a treasury bond yielding -2 percent over 30 years when cash would provide a greater return? I think once yields go negative any further upside price movement must be hampered by the sheer insanity of taking on more risk for less return than a riskless asset...at some point the monetary system breaks when it ceases to make logical sense.
Last edited by doodle on Fri Mar 06, 2020 10:15 pm, edited 2 times in total.
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Re: Negative interest rates

Post by doodle » Fri Mar 06, 2020 10:13 pm

So I do think a reaxamination of the classic 4x25 portfolio is necessary should our rates decline to the point that Europe's have. At that point I would almost think a 3x33 comprising of cash, gold and stocks would make more sense....off the cuff
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