Longtime readers know I dislike making big, headline-grabbing predictions. It’s a racket. But sometimes, vitally important matters require us to look forward and think about what is likely to come to pass. The amount of negative-interest-rate bonds having exceeded $17 trillion and heading for the sky is one of those matters.
Full disclosure: I’m not an economist, nor a bond trader, nor a banker. I don’t claim to have any special expertise on the technical nature of the negative-interest beast.
That said, the basic facts are not rocket science. I suspect that some of the experts in the area use arcane jargon to obscure the fairly straightforward nature of these basic facts.
Let’s start with those very basics.
Banks used to charge people for demand deposits (checking accounts). The fee covered the banks’ costs of facilitating payments for people, which is safer and more convenient than carrying large amounts of money around.
Banks paid people for time deposits (savings accounts, CDs, bonds). Having the use of that money for known periods of time allowed banks to use the funds to make loans and earn interest.
The advent of free checking and instant transfers between checking and savings accounts have blurred this distinction. Today, few people seem to understand or care what it means whether a bank charges or pays people when they deposit money.
Real rates are what the bank/borrower says it will pay in interest (the nominal rate) minus the inflation rate. These do turn negative from time to time, when inflation increases a great deal compared to nominal interest rates. People don’t want to lose money, of course, so such situations tend not to last long, as people demand higher rates on their deposits.
But negative nominal yields on bonds are another matter. This isn’t the lender paying the institution for the convenience of payment facilitation, as with a checking account. It’s the borrowing institution telling people: “Lend us your money for a long time so we can use it ourselves, but you get to pay us for the privilege.”
One has to ask why anyone would accept such a deal…
And remember; when the nominal rate is negative, you still have to subtract inflation, making the real rate much more negative.
So the answer has to be that people and other lenders can’t find better uses for their money.
What does $17 trillion in negative-yield bonds—and counting—mean?
It means:
- A lot of Big Money can’t think of anything better to do with a very large chunk of all the wealth in the world than to deposit it at a guaranteed loss.
- This Big Money accepts that unless substantial and prolonged deflation occurs—something that hasn’t happened for many decades and has never happened since abandonment of the gold standard—real losses will be much greater than the guaranteed losses.
- To this Big Money, investing in businesses is less appealing than accepting guaranteed losses on bonds that are hoped to keep money safe from disappearing entirely.
- This Big Money isn’t even trying to earn anything; its goal is a highly defensive effort to minimize losses.
- This Big Money doesn’t care what the little people say to the consumer-confidence pollsters.
- This Big Money doesn’t care how optimistic CEOs are on their earnings calls.
- This Big Money isn’t listening to the chatter of the talking heads in financial media, who have no skin in the game.
- And this Big Money certainly isn’t listening to the self-serving BS of politicians.
In short, some very Big Money is saying that the economic outlook is terrible.
It’s telling us it’s so bad, the smart thing to do is to hunker down in a bunker, not to try to build or create or invest in anything, anywhere.
Now, we could just ignore this warning if it were a few wealthy perma-bears and curmudgeons. But we’re talking about a lot of smart money here. And the move into negative bonds is neither done nor slowing. It’s accelerating.
An important point to make here is that it’s not just the message sent by such massive amounts of negative interest debt that concerns me. It’s the consequences of it. And that’s not just all the real businesses that get starved for capital. I think the desperate hunt for higher yields is pushing normally conservative capital into much higher risk investments. That has the potential to be extremely destructive when it unwinds.
It’s been a while since I wrote any science fiction, since my career is now based on speculating on science and facts. I don’t want to spin a fantastic yarn now, painting a gory picture of how bad things might get if this Big Money is right. I’m sure you can imagine one as well as I can. Let’s just say that the possibilities seem to range from a serious recession to Doug Casey’s long-predicted Greater Depression. The former would make and break fortunes. The latter could result in literal “blood on the streets” levels of chaos and opportunity. (Doug’s written whole books on what to do in such an event.)
Could I be wrong? Sure. But what the rapidly increasing pile of negative nominal yields is clearly not telling us is that everything is fine and the party on Wall Street can continue indefinitely.
I really don’t think the average person in the world—even among the financially literate—truly understands how important this Big Money warning is.
To me, the financial implications are clear:
- Don’t buy the deflation myth. (Yes, there are deflationary pressures, but in the end, government digital printing presses and helicopters always win.)
- Buy gold and silver—not as a speculation, but as a prudent means of safeguarding wealth.
- Avoid risk assets and any investment that requires a booming global economy to do well.
- Avoid industrial metals and commodities in general, until the storm has clearly passed.
- Some absolutely essential industrial minerals that can’t be produced at current prices, like uranium, may be exempt and are worth a speculative shot.
- Speculating on precious metals stocks, both to hedge against potential losses in mainstream investments and to create new wealth, makes a lot of sense.
- Take profits as you go is key, because sooner or later, everything gets whacked in major economic upheavals.
If you want to know which specific equities I’m buying with my own hard-earned money, please subscribe to The Independent Speculator. To keep abreast of this issue and other matters that may help you in many other ways, please sign up for my free, no-spam, weekly Speculator’s Digest.
But whatever you do, please don’t ignore Big Money’s warning.
That’s my take,
