Negative interest rates

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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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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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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.
You there, Ephialtes. May you live forever.
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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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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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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?
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Re: Negative interest rates

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

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

CIBC
Cit
Betterment
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?).

VInny
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Re: Negative interest rates

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

MangoMan 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.

Vinny
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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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Re: Negative interest rates

Post by jhogue » Sat Mar 07, 2020 2:42 am

Right now, I am making money as interest rates fall and the price of my 30 year T-bonds skyrocket. If and when my 30 year T-bonds hit their 35% rebalance band, I will sell enough to restore a 4 x 25 balance. Seems like HBPP orthodoxy to me. So why would I need to go to a 3x33 minus LTTs?

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.
“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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Re: Negative interest rates

Post by dualstow » Sat Mar 07, 2020 8:11 am

It wasn’t that long ago that not a few people were suggesting 3 x 33% portfolio, but it was cash that they wanted to get rid of.
It was mostly because they felt cash wasn’t yielding enough.
Bonds have largely been the most disliked asset in the past ten years, but they’ve also been my saving grace.
Despised even as they save us- Bonds are like Batman.
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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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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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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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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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