Strategy for neg. int. rates?

[imoldernu]

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.

 

[ESRwannabe]

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.

 

[Big_Hitter]

seems like you'd want to refi with a negative interest rate

 

[MichaelB]

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.

 

[racy]

Have kids to increase the population, or increase productivity by 80%!
Declining Population Could Reduce Global Economic Growth By 40% - Real Time Economics - WSJ

 

[imoldernu]

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.

 

[LARS]

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.


Sent from my iPad using Early Retirement Forum

 

[MichaelB]

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.

 

[GrayHare]

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.

 

[Mulligan]

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.


Sent from my iPad using Tapatalk

 

[imoldernu]

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.

 

[audreyh1]

The "guru" talking heads are always whack-a-mole which is why I stopped listening to them long ago.

 

[MichaelB]

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.

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-economy/2016/may/negative-interest-rates-tax-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

 

[MichaelB]

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..

 

[socca]

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.

 

[Totoro]

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.

 

[Sunset]

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.

 

[audreyh1]

Better lock in those CD rates!

 

[LARS]

Citi comes out publicly that the Emperor (central banks pursuing NIRP) has no clothes...

http://www.businessinsider.com/citi...) 2016-06-17&utm_term=Business Insider Select


Sent from my iPad using Early Retirement Forum

 

[petershk]

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

Sent from my HTC One_M8 using Early Retirement Forum mobile app

 

[Mulligan]

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

Sent from my HTC One_M8 using Early Retirement Forum mobile app

Peter, low rates and relative high inflation have happened before. The decade of the 1940s had many years of 10 year Treasury running at times from 4% to 8% below inflation rate, as 10 year muddled along at near 2% levels due to Fed monetary intervention. Hmm, I could have sworn I heard the words "Federal monetary intervention" in recent years.


Sent from my iPad using Tapatalk

 

[Running_Man]

I think a good study of what might happen is not Japan from 1989 onwards but the USSR. From 1919 to 1988 the Soviet Union had never had a recession, while their standard of living was lower than the US they and Japan were the 2 fastest growers of the period of 1919 to 1989 and actually their standard of living grew faster than the US throughout that period though they started at a much lower basis. Their central banks and planners carefully controlled and directed their economy in detail to avoid any serious recessions in order to maintain full employment for their citizens and avoid the ravages of unbridled capitalism. In 1989 the USSR had it’s first recession as too many of their assets were unproductive and unneeded and there was a drop in oil prices and the USSR could no longer borrow funds, and by 1991 the USSR had collapsed. 10 years later 1999 GDP in Russian was 50 percent of what it had been in 1989.

A long period of malinvestment led to unproductive assets that produced unneeded goods and too much debt. Factories closed --- by 1993 pensions, and lifetime savings of Russians citizens were devastated 40 percent of Russians officially lived in poverty. Government controls of industry, benefits and salaries ended as the government did not have the money to continue the economic control.

I don’t expect many here to follow or agree with this, and as the Central Banks have been masters of maintaining the economic illusion since 2008 I would not be totally surprised if this can be maintained for a period of years. But the day will arrive when the illusion can no longer be maintained and one can look at the Central planners of the Soviet Union and what happened in 1989 -1991 for a look at how fast a major modern economy can be totally uphended.

I continue to recommend the one portfolio that stands the test of time - Harry Browne’s Permanent Portfolio.

 

[petershk]

I think a good study of what might happen is not Japan from 1989 onwards but the USSR. From 1919 to 1988 the Soviet Union had never had a recession, while their standard of living was lower than the US they and Japan were the 2 fastest growers of the period of 1919 to 1989 and actually their standard of living grew faster than the US throughout that period though they started at a much lower basis. Their central banks and planners carefully controlled and directed their economy in detail to avoid any serious recessions in order to maintain full employment for their citizens and avoid the ravages of unbridled capitalism. In 1989 the USSR had it’s first recession as too many of their assets were unproductive and unneeded and there was a drop in oil prices and the USSR could no longer borrow funds, and by 1991 the USSR had collapsed. 10 years later 1999 GDP in Russian was 50 percent of what it had been in 1989.

A long period of malinvestment led to unproductive assets that produced unneeded goods and too much debt. Factories closed --- by 1993 pensions, and lifetime savings of Russians citizens were devastated 40 percent of Russians officially lived in poverty. Government controls of industry, benefits and salaries ended as the government did not have the money to continue the economic control.

I don’t expect many here to follow or agree with this, and as the Central Banks have been masters of maintaining the economic illusion since 2008 I would not be totally surprised if this can be maintained for a period of years. But the day will arrive when the illusion can no longer be maintained and one can look at the Central planners of the Soviet Union and what happened in 1989 -1991 for a look at how fast a major modern economy can be totally uphended.

I continue to recommend the one portfolio that stands the test of time - Harry Browne’s Permanent Portfolio.

Yep. The future is totally unknowable. In terms of Russia, the period before was even crazier. Would have been hard to predict what was going to happen in 1920 when you were living in 1900 .

But I don't fully understand the Harry Browne conclusion. Isn't it 75% US (25 stocks, 25 bonds, 25 cash) and 25% precious metals (gold coins, etc)? If GDP cuts in half and you have 1 Mil It seems like you'd lose about 40% of your value... assuming that a GDP 50% haircut doesn't result in a greater than 50% cut in stocks and bonds. In the mean time the 25% cash/metals is a pretty big drag on market performance.

Don't get me wrong... it seems like a really good strategy, but I don't see how it would be good protection against something like a Soviet style collapse... not that I can suggest a better alternative

 

[petershk]

Peter, low rates and relative high inflation have happened before. The decade of the 1940s had many years of 10 year Treasury running at times from 4% to 8% below inflation rate, as 10 year muddled along at near 2% levels due to Fed monetary intervention. Hmm, I could have sworn I heard the words "Federal monetary intervention" in recent years.


Sent from my iPad using Tapatalk

Totally. I think the 1970s were also pretty bad in this area (though I didn't live through that). It CAN happen, and in fact I think it's more than unlikely to happen... I just HOPE it doesn't .

 

[audreyh1]

I always hear phrase "federal monetary intervention" every decade I've been investing. It's what they do!