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Strategy for neg. int. rates?
Old 06-16-2016, 11:13 AM   #1
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Strategy for neg. int. rates?

Apparently not a real fear, but if:
interest rates turned negative... what to do.
Is it time to pay everything possible now... mortgage, auto loan, rents, and everything that could possibly paid ahead?
What about cash? In savings accounts or wherever one keeps cash.

What is happening in countries where this is becoming a reality?

As a non-investor, most of this is over my head, but as I watch gold prices rise, the possibilities seem to be worth investigating.
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Old 06-16-2016, 11:21 AM   #2
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Originally Posted by imoldernu View Post
Apparently not a real fear, but if:
interest rates turned negative... what to do.
Is it time to pay everything possible now... mortgage, auto loan, rents, and everything that could possibly paid ahead?
What about cash? In savings accounts or wherever one keeps cash.

What is happening in countries where this is becoming a reality?

As a non-investor, most of this is over my head, but as I watch gold prices rise, the possibilities seem to be worth investigating.

Sounds like a good time to lever up.
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Old 06-16-2016, 12:25 PM   #3
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seems like you'd want to refi with a negative interest rate
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Old 06-16-2016, 12:34 PM   #4
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Originally Posted by imoldernu View Post
Apparently not a real fear, but if:
interest rates turned negative... what to do.
Is it time to pay everything possible now... mortgage, auto loan, rents, and everything that could possibly paid ahead?
What about cash? In savings accounts or wherever one keeps cash.

What is happening in countries where this is becoming a reality?

As a non-investor, most of this is over my head, but as I watch gold prices rise, the possibilities seem to be worth investigating.
Negative interest rates point to an excess of savings around the world, and that corresponds to inadequate demand. Inflation is unlikely, slow growth is far more likely.

Betting on a specific outcome is risky and is more likely to lose rather than win the day. We will reduce portfolio risk a bit and stay well diversified. That, and avoid leverage.
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Old 06-16-2016, 12:43 PM   #5
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Old 06-16-2016, 01:57 PM   #6
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As best as I can figure, from reading business websites, Negative interest is somewhat like a game of whack-a-mole. The imbalance of value in the countries of the world is a matter of making true value assessments of the stability in each country relative to the rest.

Establishing bond rates, internally first, then externally evaluating those rates, leads to the buy/sell value. It appears to me, that investments are chancy at best for individual investors. So far, the imbalance seems to be on a macro level... ie., Brexit/remain, and predictions for future governmental economic actions of most likely "next" movements, as France, Germany, Japan, and most recently, the probability that Canada might turn to negative rates.

Whilst we have for decades moved in relatively slow and steady steps towards change... (even the last recession was not 'sudden'), it seems to me that the current position of the FED is much weaker, and not well poised to defend in the same way as it was during the last bank bailout.

Recent history seems to lean towards a time period whereby a conservative investor would be able to adjust to changes in a portfolio.

But...
What of a longer term plan to be triggered well in advance (as opposed to adjusting portfolio allocation). To go to gold... to buy real estate, to upgrade (or downgrade) housing. To prepare for business downsizing, salary reduction or termination... or more positively, to consider employment change to a safer profession.

Information available on the internet re: negative rates, is very wide ranging, from a minor inconvenience to an apocalyptic event, and for the most part does not look forward, but merely to explain the intrabank and international movement in bonds. Very little is directed to effects on the individual, and even to suggestions for investors.

For many on this forum, a heads up on the possibilities for the immediate future in 2007, might have made a difference. A little crystal ball gazing isn't always a waste of time.
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Old 06-16-2016, 02:58 PM   #7
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The use of NIRP, which is an extreme extension of ZIRP, is to a large extent the modern day equivalent of competitive currency devaluation in the fixed rate world of old. Central banks are competing for any, and all, demand they can find to offset weak domestic demand. It is perverse by its nature: and, therefore very difficult for mere mortals to actively position against IMHO.


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Old 06-16-2016, 05:07 PM   #8
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As best as I can figure, from reading business websites, Negative interest is somewhat like a game of whack-a-mole. The imbalance of value in the countries of the world is a matter of making true value assessments of the stability in each country relative to the rest.
Negative interest rates are imposed by a Central Bank on the country's banking reserves. This drives interest rates down across the banking system and then out into the real world. It happens because there is an excess of savings. It's not whack-a-mole, it's basic supply and demand. "Safe" assets are the debt of select large governments such as US and Germany. There is so much demand for that debt, buyers are willing to pay (instead of be paid) so that they may avoid 1) paying more to the Central Bank and 2) lending the money or taking on greater risk elsewhere.

The conservative individual investor should do what he/she always does. Stick with highly liquid and broad based asset classes, such as developed country equities and investment grade fixed income. Minimize costs, fees and taxes. Maximize the use of tax deferred accounts. Don't increase the portfolio risk or add leverage to juice returns. Stick with safe assets, keep the risk to an acceptable level, and accept that some years will be bad.

The cost of cash is especially low, so it allows the possibility of having a higher than normal cash allocation, and perhaps take advantage of some increased volatility to buy value when it appears.
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Old 06-16-2016, 05:22 PM   #9
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If negative interest rates are being caused primarily by the deflationary effects of globalization they should set the stage for dramatic global growth this century. This suggests investors with a long-term horizon should be leaning toward international equities.
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Old 06-16-2016, 05:31 PM   #10
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Negative interest rates point to an excess of savings around the world, and that corresponds to inadequate demand. Inflation is unlikely, slow growth is far more likely.

Betting on a specific outcome is risky and is more likely to lose rather than win the day. We will reduce portfolio risk a bit and stay well diversified. That, and avoid leverage.


I wont get into the boring details but a detailed article clearly articulated your thoughts. Plus he cited several examples for deflationary problems with those rates such as low rates keeping zombie companies alive and driving prices down with dumping to stay in business. That was just one of many many examples... Very interesting stuff.
Personally I would just be happy with 30 yr mortgage dropping another point then I would jump back into the refi game.


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Old 06-16-2016, 07:44 PM   #11
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The whack-a-mole reference was more to the daily changes in interpretation from almost every financial wisdom source. There is very little agreement between the many gurus as to what the meaning of negative interest rates is, and how the stability of the country being analyzed is perceived. While some analysts look to inflation or deflation as a measure of stability, others ignore this and look to the central bank of the country as the arbiter of policies that determine the same stability.

A simple Google search of recent news will point to almost as many theories about the rates, as there are analysts.

Here's one site that gets into some detail about the complexities. (seeking alpha).

Negative Interest Rates On The Horizon For The U.S. | Seeking Alpha

Agreed that as of today, the subject seems far off, and that the most logical approach for an investor is to understand volatility, stay a conservative course, and adjust accordingly. That said, we're in uncharted waters... (read that as the Marianas Trench... three times the average ocean depth, but not found until 1875.) We haven't been here before.

Most of the forum members have considered the possibility of a sharp downturn. I was looking for some other outside the box thinking for a longish period that involved something other than a reallocation of investment assets. The markets in 1939 and 1974 saw recovery periods of 8 or 9 years, and the 2008 recession, a four or five year recovery.

While not a "prepper" advocate, the idea of sharing, trade or bartering or consolidation of non liquid assets with family or neighbors might not be too far removed from imagination. Preplanning or working towards an austerity budget outline could also be a possibility, and at the very least, careful consideration before taking on a long-term debt may be in order.

So, negative interest rates may not be a triggering factor, but looking beyond tomorrow's DJIA might not be a bad idea.
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Old 06-17-2016, 06:00 AM   #12
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The "guru" talking heads are always whack-a-mole which is why I stopped listening to them long ago.
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Old 06-17-2016, 07:54 AM   #13
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Originally Posted by imoldernu View Post
The whack-a-mole reference was more to the daily changes in interpretation from almost every financial wisdom source. There is very little agreement between the many gurus as to what the meaning of negative interest rates is, and how the stability of the country being analyzed is perceived. While some analysts look to inflation or deflation as a measure of stability, others ignore this and look to the central bank of the country as the arbiter of policies that determine the same stability.

A simple Google search of recent news will point to almost as many theories about the rates, as there are analysts.
See Audrey1's response.
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The "guru" talking heads are always whack-a-mole which is why I stopped listening to them long ago.
Anyone can write or talk on TV. That makes them good at communication but says nothing about their real knowledge. In the computing world, GIGO. Shakespeare was more eloquent, writing "All that glitters is not gold".

Here are two recent articles that are written by real experts. This, by C.J. Waller, Executive Vice President of the St Louis Federal Reserve Bank https://www.stlouisfed.org/on-the-ec...sheep-clothing and this, published by the Brookings Institute, summarizing views by a couple of ECB exocomists. Are negative rates a “calamitous misadventure"? ECB economists say no | Brookings Institution
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Old 06-17-2016, 08:15 AM   #14
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Most of the forum members have considered the possibility of a sharp downturn. I was looking for some other outside the box thinking for a longish period that involved something other than a reallocation of investment assets. The markets in 1939 and 1974 saw recovery periods of 8 or 9 years, and the 2008 recession, a four or five year recovery.

While not a "prepper" advocate, the idea of sharing, trade or bartering or consolidation of non liquid assets with family or neighbors might not be too far removed from imagination. Preplanning or working towards an austerity budget outline could also be a possibility, and at the very least, careful consideration before taking on a long-term debt may be in order.

So, negative interest rates may not be a triggering factor, but looking beyond tomorrow's DJIA might not be a bad idea.
What happens if all the asset markets in the world are flat for 10 years? If your withdrawal rate is 4%, and the portfolio yields 2%, and inflation is 1%, at the end of the 10th year, the portfolio has fallen by about 23% in nominal terms, and about a 1/3 in real terms. This is a serious decline but not a calamity, very similar to the declines suffered in 2002 and 2008.

It seems to me that the three most important things one can to in that environment are 1) minimize investment fees and costs, 2) minimize taxes, and 3) control one's expenses.

In a situation such as this it's not clear that "out of the box" thinking is called for. Looking for non-traditional sources of income is fine, and containing portfolio risk and controlling expenses may be plain vanilla suggestions, but in a stagnating, low return environment I think they are proven winners. Just one man's humble opinion..
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Old 06-17-2016, 09:10 AM   #15
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Apparently not a real fear, but if:
interest rates turned negative... what to do.
Negative rates in the U.S. (and abroad) do not affect me unless they afflict all types of bonds (e.g. corporates, munis, etc.) and all durations (e.g. 10 yrs, 30 yrs, etc.). Since I don't see this happening, I don't worry about it.
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Old 06-17-2016, 09:59 AM   #16
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I can get a mortgage now at about 0.94% interest, fixed for two years. At the same time I can get a 2 year CD for 1.20% interest.

There's one possible strategy for negative interest rates ..

A 20-year fixed mortgage costs 2.3%, still below some dividend aristocrats.
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Old 06-17-2016, 01:00 PM   #17
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I won't be putting any cash into the bank if I have to pay them to hold it.

I'm not sure we are that far off of (-) interest rates, since Germany just went (-) and they are a powerhouse economy.

Not even sure bartering is a solution, since all goods would tend to deflate due to the lack of demand causing the (-) interest rates.

Would stocks actually go up, since companies could borrow for free, or get paid to borrow, so they could increase their dividend without any cost.
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Old 06-17-2016, 05:54 PM   #18
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Better lock in those CD rates!
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Old 06-17-2016, 06:17 PM   #19
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Citi comes out publicly that the Emperor (central banks pursuing NIRP) has no clothes...

http://www.businessinsider.com/citi-...sider%20Select


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Old 06-18-2016, 09:34 AM   #20
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My very limited understanding is that the negative rates effect the institutions more because they are obligated to have a certain amount of assets in certain areas.

Even with millions an individual investor has more flexibility.

I think staying with asset allocation is probably OK because even though interest rates are low, that had to be compared to inflation, taxes, etc. What would suck is low rates and high inflation .

Personally I converted my bond holdings into CD ladders at 2% for 5 year CDs with a 6 month penalty. So if rates go up fast I can just pay the penalty.

That said its a personal decision that might be bad. Bond ETFs pay more than that and have a much smaller tax impact, but I'm concerned that rates will go up and bond funds will have a continued long term bad return. It seems near certain to me, but you know... been wrong a lot more than right in the past.

Guess we have to optimize around sleeping at night and I sleep well now

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