Negative interest rates

Discussion of the Bond portion of the Permanent Portfolio

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pmward
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Re: Negative interest rates

Post by pmward » Sat Mar 07, 2020 8:20 am

doodle wrote:
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
It doesn't have to be an all or nothing binary switch. I mentioned in another thread earlier this week that if the 30 year goes into negative territory I'm debating on setting up a rule to start moving from 30 year to 10 year like IEF. This reduces average duration. I am also currently tightening up my cash from 1 year bills to 90 day bills now that we are in a negative real yield environment. This skews down the average duration, which changes the risk/reward equation greatly. It dampens bonds returns if yields go more negative (but I still can participate if this does happen), but it also helps to hedge rates going back up. I'm not sure that a 33/33/33 portfolio would be any more protected in a rising rate environment than a 25/25/25/25 with 90 day bills and IEF (or similar) as the bond barbell piece as stocks and gold will both reprice as well when this does happen. This not to mention the fact that part of the way the PP fundamentally works is to hold the losers and buy/rebalance into them when they are out of favor. If you completely forego the downturn altogether, you lose out on that ability to buy the dip. Bonds will eventually have a bear market... they also will inevitably rise again. In my scenario I would theoretically be in 10 year with negative nominal 30 year bonds, but I would be selling 10 year and going back to 30 year if we went positive again. I'm not sure I will actually do this, but it is something I'm kicking around in my head at the moment.
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Hal
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Re: Negative interest rates

Post by Hal » Sat Mar 07, 2020 1:57 pm

jhogue wrote:
Sat Mar 07, 2020 2:42 am
As for Cash, if our central bankers should ever be so foolish as to try to impose negative interest rates on retail banking clients, they will likely trigger a good old-fashioned bank run. The American consumer could operate the economy with greenbacks -- and, if necessary, gold as well. Personally, I doubt it will come to that.
You may wish to consider what is currently happening in Australia....

https://www.news.com.au/national/orwell ... 7d95d4fb3f
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Re: Negative interest rates

Post by Pet Hog » Sat Mar 07, 2020 4:23 pm

From a quick google search I found that, according to this chart, there are $1.46 trillion US dollars in circulation (paper money, greenbacks). According to this PBS article, the population of the US is 331 million. That means each person could hold, on average, about $4400 in cash.

What that tells me is that it will be impossible for all investors to say, "I'm not going to invest in negatively yielding bonds. What do you think I am? Stupid? I'm just going to hold cash until the yields turn positive again!" There's just not enough paper money in circulation.

Hoard now and avoid the rush!

In other words, someone's going to have to hold the bonds. For comparison, US Treasury debt is about $14.4 trillion, so about 10 time bigger than the amount of circulating cash.

$1.46 trillion sounds like a lot of dollar bills, but Jeff Bezos is worth $116 billion -- that's $0.116 trillion. He alone could stockpile one-fourteenth of all the US dollars in existence!
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Re: Negative interest rates

Post by Hal » Sat Mar 07, 2020 5:13 pm

Pet Hog wrote:
Sat Mar 07, 2020 4:23 pm

What that tells me is that it will be impossible for all investors to say, "I'm not going to invest in negatively yielding bonds. What do you think I am? Stupid? I'm just going to hold cash until the yields turn positive again!" There's just not enough paper money in circulation.

Hoard now and avoid the rush!
Hi Pet Hog,

If that's the case do you believe this theory is correct?

<snip>
Initially, this process creates demand for paper money and paper gold, as whatever value is present in the upper levels of the inverse debt pyramid must pass through these on the way down into gold and the security of the asset pyramid
<snip>
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pmward
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Re: Negative interest rates

Post by pmward » Sat Mar 07, 2020 5:15 pm

Yes, small time retail investors could hold physical cash, but it would be almost impossible for large institutions and businesses, which is really where most of the wealth is held.

Aside from the possibility, there is also the feasibility aspect. Where to stash this cash? Obviously, the members of this forum are very well versed in how difficult and expensive it is to hold hard physical assets. If you wanted to go ultra cheap and bury it in the back yard... well Pablo Escobar used to write 10% of his buried cash off because he averaged 10% either destroyed by the elements or found and taken by someone else. Interestingly, this is also why the "effective lower bound" is rumored to be around -10% yield, because at that point burying cash becomes an arbitrage opportunity, lol.

Also, there has been talk in some of the negative yielding countries of creating paper dollars with a decay rate. So it would have printed on its something like "declines in value 1% per year after 2020". The idea being to try to keep dollars in circulation for less than a year, and anyone that tries to hold would be penalized. So in this system even paper money would have a decay built in.

Negative yields in the U.S. would definitely force a lot of people out into riskier assets with money that they otherwise would have kept safe...
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Re: Negative interest rates

Post by Pet Hog » Sat Mar 07, 2020 6:11 pm

Hal wrote:
Sat Mar 07, 2020 5:13 pm
If that's the case do you believe this theory is correct?
Hal, that's a beautiful and informative chart. Yes, I would have to say I do believe in the theory, whatever it might be! (I suspect it says that as money pours into an economy it goes to higher levels of the double-pyramid -- with riskier assets, but larger markets, upon climbing the inverted pyramid -- but always passing through the small gold market.)
pmward wrote:
Sat Mar 07, 2020 5:15 pm
Yes, small time retail investors could hold physical cash, but it would be almost impossible for large institutions and businesses, which is really where most of the wealth is held.
I feel that the small-time investors are eventually going to spend that physical cash and it will end up with the large institutions. I don't see how there's going to be any good way to avoid all forms of cash (bank accounts, credit cards, short-term treasuries) losing value -- even notes printed with decay rates, as you say, pmward.

Another thing I was considering adding to my earlier post is that governments are still going to issue bonds no matter where yields are. The government needs the money and will get it somehow. Again, someone's going to have to buy those negatively yielding bonds, and the cost will be passed on to the consumer. I have no idea how that will affect the economy, but I can't believe it will be sustainable. For now, I'm happily in the PP, at an all-time high.
pmward wrote:
Sat Mar 07, 2020 5:15 pm
well Pablo Escobar used to write 10% of his buried cash off because he averaged 10% either destroyed by the elements or found and taken by someone else.
Funnily enough, I'm traveling through Medellin as we speak. I shall keep my eye out for buried treasure!
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Re: Negative interest rates

Post by Tortoise » Sat Mar 07, 2020 6:46 pm

Negative interest rates aren’t so weird in a deflationary environment, in which the rate of inflation is negative.

So my guess is that if we see negative interest rates in the U.S. for a long period of time, it will be during a long, drawn-out deflation.
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Re: Negative interest rates

Post by Kriegsspiel » Sat Mar 07, 2020 6:59 pm

Tortoise wrote:
Sat Mar 07, 2020 6:46 pm
Negative interest rates aren’t so weird in a deflationary environment, in which the rate of inflation is negative.
I still don't see the point of intentionally lending people money and getting back less in return. Just don't lend them the money in the first place and you make a higher.... "return."
You there, Ephialtes. May you live forever.
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Re: Negative interest rates

Post by doodle » Sat Mar 07, 2020 7:37 pm

pmward wrote:
Sat Mar 07, 2020 5:15 pm
Negative yields in the U.S. would definitely force a lot of people out into riskier assets with money that they otherwise would have kept safe...
It seems to me as interest rates approach zero on the longer end of the spectrum it would drive money into stocks, gold and cash. Again, I don't see the logic of taking a great amount of interest rate risk for a negative return. I really think its possible that we see the ten year touch negative yields if this coronavirus continues to spread and so at some point need to formulate a plan should us bonds go negative...
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Hal
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Re: Negative interest rates

Post by Hal » Sat Mar 07, 2020 7:53 pm

Pet Hog wrote:
Sat Mar 07, 2020 6:11 pm
Hal wrote:
Sat Mar 07, 2020 5:13 pm
If that's the case do you believe this theory is correct?
Hal, that's a beautiful and informative chart. Yes, I would have to say I do believe in the theory, whatever it might be! (I suspect it says that as money pours into an economy it goes to higher levels of the double-pyramid -- with riskier assets, but larger markets, upon climbing the inverted pyramid -- but always passing through the small gold market.)
;D https://web.archive.org/web/20120104214 ... gspot.com/
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Re: Negative interest rates

Post by pmward » Sat Mar 07, 2020 8:35 pm

doodle wrote:
Sat Mar 07, 2020 7:37 pm
pmward wrote:
Sat Mar 07, 2020 5:15 pm
Negative yields in the U.S. would definitely force a lot of people out into riskier assets with money that they otherwise would have kept safe...
It seems to me as interest rates approach zero on the longer end of the spectrum it would drive money into stocks, gold and cash. Again, I don't see the logic of taking a great amount of interest rate risk for a negative return. I really think its possible that we see the ten year touch negative yields if this coronavirus continues to spread and so at some point need to formulate a plan should us bonds go negative...
Negative interest rates are good for bonds... bonds (especially long term) are risk assets, and would get a bid in negative yielding times. Look at how much bonds are up this year? Do you think the capitol appreciation stops the moment bonds go negative? No the capitol appreciation goes on steroids the moment bonds go negative.
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Re: Negative interest rates

Post by pmward » Sat Mar 07, 2020 8:40 pm

Tortoise wrote:
Sat Mar 07, 2020 6:46 pm
Negative interest rates aren’t so weird in a deflationary environment, in which the rate of inflation is negative.

So my guess is that if we see negative interest rates in the U.S. for a long period of time, it will be during a long, drawn-out deflation.
This is precisely what we are in now. Corporate profits of S&P 500 companies in aggregate have not increased since 2012. It's been a very long, slow, drawn out deflation since then, and the only reason the lay public has not realized this is because interest rates have been artificially low and the Fed has been printing money. I cannot remember where I read it, but someone wrote an article calling it "The Silent Depression" because the growth in our country has actually been behind the growth of the Great Depression at this point in the cycle... but nobody realizes it because of the Fed's distortions.

The low interest rates has also allowed companies to borrow dirt cheap to buy back shares, which further distorts earnings per share to make it look like there has been an increase in earnings when there hasn't been. It's all a big, giant distortion. But to anyone that knows where to look in the data, it's clear as day. There is real risk of negative rates here right now. Now I don't think they are going to drop down in one sharp move, there's going to be volatility along the way. Bonds are likely to get a pullback here in the short term, as they are in pretty uncharted territory from an overbought standpoint in the short term. Something could happen to change the trajectory as well... but right now trend and momentum are pointing us that way. The bond markets are right (as they usually are), we are in a deflation and have been for years.
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Re: Negative interest rates

Post by Tortoise » Sun Mar 08, 2020 4:34 pm

Kriegsspiel wrote:
Sat Mar 07, 2020 6:59 pm
I still don't see the point of intentionally lending people money and getting back less in return. Just don't lend them the money in the first place and you make a higher.... "return."
I totally agree for small amounts of cash. But for larger amounts, like nest eggs and large businesses, physical cash just isn’t practical. People and businesses need to park large sums of cash in non-physical forms.
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Re: Negative interest rates

Post by Kriegsspiel » Sun Mar 08, 2020 7:48 pm

Tortoise wrote:
Sun Mar 08, 2020 4:34 pm
Kriegsspiel wrote:
Sat Mar 07, 2020 6:59 pm
I still don't see the point of intentionally lending people money and getting back less in return. Just don't lend them the money in the first place and you make a higher.... "return."
I totally agree for small amounts of cash. But for larger amounts, like nest eggs and large businesses, physical cash just isn’t practical. People and businesses need to park large sums of cash in non-physical forms.
I was replying to doodle, IE, what can we do.
You there, Ephialtes. May you live forever.
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Re: Negative interest rates

Post by Pkg Man » Sun Mar 08, 2020 8:19 pm

What about US savings bonds, for the cash portion? I have some EE and I bonds. Recently thought about dumping the I bonds since T bill rates were creeping up but now think I’ll just hang onto them. EE’s are the best since no matter what the rate at issue is they are guaranteed to double in 20 years, of course they could reneg on that promise. I’s have a zero bound no matter what the inflation rate is.
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Re: Negative interest rates

Post by dualstow » Sun Mar 08, 2020 8:45 pm

Pkg Man wrote:
Sun Mar 08, 2020 8:19 pm
What about US savings bonds, for the cash portion? I have some EE and I bonds. Recently thought about dumping the I bonds since T bill rates were creeping up but now think I’ll just hang onto them. EE’s are the best since no matter what the rate at issue is they are guaranteed to double in 20 years, of course they could reneg on that promise. I’s have a zero bound no matter what the inflation rate is.
Maybe they’ll let us buy even fewer savings bonds in the future.
RIP Marcello Gandini
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Re: Negative interest rates

Post by doodle » Sun Mar 08, 2020 9:33 pm

pmward wrote:
Sat Mar 07, 2020 8:40 pm
The low interest rates has also allowed companies to borrow dirt cheap to buy back shares
So imagine an environment where companies get paid to borrow money to buy back their shares... They win on both ends!

Negative interest rates (won't be harbinger of coming Deflation due to central bank intervention) I think they will however drive investment into other asset classes paradoxically driving up asset prices in nominal terms at least. Ultimately though it's anyone's guess what happens when the banking system is turned on it's head.

At some point though holding a negatively yielding 30 year bonds makes no sense....I can see holding it around 0 but as yield continues to decline it no longer makes any logical sense.

Presently 10 year rates under .5%....unbelievable.
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Re: Negative interest rates

Post by doodle » Sun Mar 08, 2020 9:44 pm

Pkg Man wrote:
Sun Mar 08, 2020 8:19 pm
What about US savings bonds, for the cash portion? I have some EE and I bonds. Recently thought about dumping the I bonds since T bill rates were creeping up but now think I’ll just hang onto them. EE’s are the best since no matter what the rate at issue is they are guaranteed to double in 20 years, of course they could reneg on that promise. I’s have a zero bound no matter what the inflation rate is.
Yes...unfortunately I think purchase sizes are limited to 10k a year???
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Re: Negative interest rates

Post by pmward » Mon Mar 09, 2020 9:02 am

doodle wrote:
Sun Mar 08, 2020 9:33 pm

At some point though holding a negatively yielding 30 year bonds makes no sense....I can see holding it around 0 but as yield continues to decline it no longer makes any logical sense.
Logical sense left the building ages ago. The big league pitching thrown by markets is tough to hit these days. Selling at 0 could very well be the biggest mistake you ever make. Volatility will increase, but there is a chance that those long term bonds you're getting scared of could be the only thing that save your ass... I mean look at what's happening to oil right now? We are in full on deflation mode at this point. Strap in your seatbelt...
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Re: Negative interest rates

Post by I Shrugged » Mon Mar 09, 2020 10:24 am

There is a reason the Fed types have the term "the zero bound". Sure, things can go negative. It has happened in non-US markets. But as discussed above, as a practical matter it probably can't last too long. If nothing else, it would inflame dangerous sentiments with consequences hard to forsee. That's my opinion any way.

I guess I expect the Fed to buy a lot of stocks.
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Re: Negative interest rates

Post by pmward » Mon Mar 09, 2020 10:59 am

I Shrugged wrote:
Mon Mar 09, 2020 10:24 am
There is a reason the Fed types have the term "the zero bound". Sure, things can go negative. It has happened in non-US markets. But as discussed above, as a practical matter it probably can't last too long. If nothing else, it would inflame dangerous sentiments with consequences hard to forsee. That's my opinion any way.

I guess I expect the Fed to buy a lot of stocks.
Cancel that, the Fed stopped using the words "zero lower bound" after their rate hiking cycle failed in Dec 2018, and these days all their minutes refer to the "effective lower bound", which is well below zero. They are also on record discussing negative interest rates and how they believe they would have helped in the financial crisis. 0 is seen as an arbitrary number to them these days. They would have no qualms going negative. It's all on public record in their minutes, and you can look them up for yourself.
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Re: Negative interest rates

Post by I Shrugged » Mon Mar 09, 2020 3:22 pm

At least then, they realize there is a point at which it won't work. More importantly it will backfire. I suspect that will happen if they hit zero, and I bet some Fed people feel the same.
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Re: Negative interest rates

Post by doodle » Mon Mar 09, 2020 3:37 pm

But then what? Too late to walk it back...seems like zero interest rates are like a trap.
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Re: Negative interest rates

Post by pmward » Mon Mar 09, 2020 4:16 pm

doodle wrote:
Mon Mar 09, 2020 3:37 pm
But then what? Too late to walk it back...seems like zero interest rates are like a trap.
The same thing that always happens then. The debt eventually gets inflated away. Eventually (this is likely years or even decades away) we wind up at a point where rates are able to go back up again. It's not the negative rates that are the trap, it's the deficit that is the trap. Until that's inflated away sufficiently, rates are extremely limited in how much higher they can go. Like I said, this is likely to be a long process, as the negative rates will encourage the government to borrow more... prolonging the cycle. It's only when inflation eventually takes hold that they will start to check their spending.

The only other option, and God help us all if they go this route, is to try to run a surplus to pay the deficit down. If the government runs a surplus, it means that households and corporations necessarily have to run an equally large deficit. That's when all of our lives get really miserable.
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Re: Negative interest rates

Post by Tortoise » Mon Mar 09, 2020 5:21 pm

pmward wrote:
Mon Mar 09, 2020 4:16 pm
The only other option, and God help us all if they go this route, is to try to run a surplus to pay the deficit down. If the government runs a surplus, it means that households and corporations necessarily have to run an equally large deficit. That's when all of our lives get really miserable.
Care to elaborate? Couldn't the government run a surplus by just spending less while collecting the same amount of revenue in taxes and bonds? If that were to happen, why would households and corporations be miserable?

Hypothetically, let's say the government reduced spending mainly by cutting way back on "defense" (i.e., offense). A lot of people employed in the defense industry and related industries would probably have to find employment elsewhere, which implies a certain amount of suffering for them, but what about everybody else?
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