… we have begun a bull market in the world ‘control’ and a long bear market in the word ‘market’. Whether spoken in French, German or Bulgarian – ‘controle’, ‘steurung’ or ‘kontrole’ – all lead to the same thing: a bull market in gold.
– Russell Napier, The Solid Ground
If you borrow money from a loan shark at a negative interest rate do you break his kneecaps if you don’t repay?
Hmmm.
Food for thought.
This question, posed in jest on Twitter by macro investor Michael Lebowitz, is an illustration of not only how ludicrous negative rates are, but also how normal they are becoming. If this environment carries on much longer, we may end up not even joking about the absurd phenomenon of negative rates.
The outstanding stock of negative-yielding corporate bonds just went over a trillion dollars. Paying to lend money to a for-profit organisation is becoming de rigueur. Can you imagine how high stock prices will go when companies can borrow money at negative rates to buy their own stock back?
There’s another $14 trillion dollars of negative-yielding bonds to governments. Considering how happily politicos will make spending promises to buy votes, it’s only a matter of time before they start rewarding investors for their “financial prudence” and “portfolio diversification”.
“So you’ll pay me £102 if I promise to pay you £100 in the future? Sure, idiot. You can have as many of those promises as you like.”
That $15 trillion ain’t going anywhere either – we’ve barely witnessed the beginning of the rate-cutting cycle. That number’ll be a hell of a lot bigger before we see the end of this fever dream.
What can be done about it?
As the Irishman replies to the tourist asking which way it is to Dublin in the classic joke, “I wouldn’t start from here.”
We just have to wait for the fever to run its course. That, and make sure you’ve got some exposure to gold (and to the miners if you’re really hungry),
I reckon it’ll be fiscal stimulus – grand infrastructure plans, military spending, anti-climate change boondoggles, universal basic income and the like – which will bring forth the inflation required to break the fever and tear down valuations in the bond market to anything like a historical norm.
But Charlie Morris wrote in The Fleet Street Letter that this fever might finally break all by itself (slightly redacted):
However this fever breaks, those who treated negative interest rates as “normal” are wearing concrete boots – you want a parachute, you buy gold.
All the best,
Boaz Shoshan
Editor, Capital & Conflict
Category: Market updates