Monday, April 18, 2016

Sovereigns Slaughter Savers

We formerly lived in a world that, when someone borrowed money, they paid interest on their debt until the loan was paid back.

That world increasingly does not exist anymore among many of the sovereign nation borrowers around the world.

The borrower no longer pays interest on its borrowings---it collects interest.

It is unheard of in recorded (or unrecorded) history.

For context, here is a chart that Business Insider prepared on historical interest rates going back to 3000BC.  Back in Mesopotamia the going interest rate was 20% per year on loans.

I have followed the trend of negative interest rates with some interest but I had no idea it has reached the level it has globally until I read a recent report from Elliott Wave International.

Elliott Wave reports (citing Bianco Research) that negative interest rates now constitute an astounding 46.2% of the non-U.S. bond market worldwide!

Japan alone has 66% of the world's negative-yielding debt. However, there are a lot of other European countries joining the trend as this chart from Elliott Wave demonstrates.

The sub-zero interest rate environment also now appears to be leaking into the European corporate bond market according to Elliott.

Last week, bond yields on the debt of Royal Dutch Shell Plc and Siemens AG dropped below zero. According to Bloomberg, about 16 billion worth of euro-denominated corporate debt is trading with yields below zero, spurred on by the ECB's latest deflation-fighting scheme of starting to buy non-bank corporate notes.

All of this has actually helped the U.S. treasury bond market in the short term. Since there is no interest rate yield in much of the rest of the world, the meager U.S. interest rates look relatively attractive. In fact, in the first quarter of 2016, U.S treasuries produced a total return of 9.8%, the best first-quarter performance since 1986 (per Bianco Research).

How long does all this last?

I don't know.

However, it will not last.

It defies all laws of economics, not to mention, common sense.

I don't think 5,000 years of history are wrong.

Those that hold these negative-interest rate bonds risk extraordinary losses when interest rates rise.

The central bankers around the world that are penalizing and punishing savers are playing a dangerous game that could put all of us at risk.

Economic progress is not made without the investment capital provided by savers and investors.

Without savers there is no investment. And without investment there is no economic growth.

Without savings deposits, banks can't make loans.

The economy eventually grinds to a halt.

Insurance companies, pension funds and others that need attractive positive bond yields for their business models to work are also placed at great risk in this environment.

Without positive yields, they risk collapse and the cascading effects to the economy would be severe.

The slaughter of savers will eventually strangle us all.

It needs to stop...and soon.

No comments:

Post a Comment