“But I don’t want to go among mad people,” Alice remarked. “Oh, you can’t help that,” said the Cat: “we’re all mad here. I’m mad. You’re mad.” “How do you know I’m mad?” said Alice. “You must be,” said the Cat, “or you wouldn’t have come here.”
Just as Alice ventured deeper into Wonderland, investors across the world are now entering a period of implausible madness as it relates to negative interest rates.
What once seemed utterly foreign to savers has now become a reality of epic proportions. My first mention of negative interest rates in this column was made in late June. Back then, about $13 trillion of debt around the globe was priced to produce less-than-zero return. Yes, we’re talking about a guaranteed loss to investors. Now, less than a few months later, yet another $4 trillion has been piled onto the mountain of negative-yielding government debt.
And, just as the Cat informed Alice that she’s as crazy as the others, the US now appears to be moving ever-closer to the same bizarre financial conditions we see throughout Europe and Japan. In less than a year’s time, the 10-year US Treasury yield has plunged from near 3.25% to under 1.5%. Sudden downward moves in interest rates like this are truly rare, and when coupled with an inverted yield curve typically indicates major economic weakness is on the horizon. However, this time, and for now, the stock market has simultaneously and substantially risen in 2019. This conundrum is quite palpable for students of market history.
As I’ve dug more deeply into the rationale of investors’ mysterious acceptance of negative yields, the understanding I’ve sought has not yet emerged. As Alice experienced first-hand, when faced with something you know to be crazy, others will work very hard to convince you, and themselves, otherwise!
For example, here is a fun way to convince you that negative interest rates are not so nutty. Faced with a negative interest rate in their savings account, a rational person would simply refuse to accept the slow and steady confiscation of their wealth by their bank and would instead withdraw their cash in order to bury it in their back yard or hide it under their mattress.
Of course, to truly safeguard your pile of cash – or your preferred store of value, such as gold bars or gems – you would incur some ongoing expenses to keep it secure. That expense could take the form of guns, building a tall fence, installing an elaborate security system or even hiring private security guards. Using the power of this logic, why is it so odd to think that you’d willingly pay your bank to hold your money in safekeeping?
And so, as Alice aptly noted, it appears things may keep getting “Curiouser and curiouser!” until investors eventually wake up.
Jason P. Tank, CFA is both the owner of Front Street Wealth Management, a purely fee-only advisory firm and the founder of the Money Series, a non-profit program committed to providing open-access to financial education, for all. Contact him at (231) 947-3775, by email at Jason@FrontStreet.com and at www.FrontStreet.com