Feb/March Market Commentary- Negative RatesSubmitted by Mark Smith-Windsor Investment Advisor on April 4th, 2016
“Why, sometimes I've believed as many as six impossible things before breakfast.”
- Alice in Wonderland (Lewis Carroll)
A significant portion of the world’s governments are able to borrow money at negative interest rates. Approximately $7
Trillion in government bonds now have negative yields.
It’s hard to get your head around how this actually works. I knew a guy in high school who liked to borrow money and
he would pay most of it back. That is pretty much how it works. The bonds are sold with either no interest payment or a
very tiny interest payment, but on repayment you receive most, but not all, of your money back. This is certain to be a
money losing proposition over time.
This exists for a few reasons. The governments want it that way and there are few easy alternatives. Individuals and
companies with significant cash holdings have to put them somewhere and physical cash is basically a no-no in most
developed countries. Everyone has all of their money in banks, and banks have excess liquidity that they need to put
somewhere and from a regulatory perspective only IOU’s from the central government will do.
There used to be a fairly significant percentage of the population that simply didn’t trust banks. They were cash only,
and an ideal savings account was a tin can buried two steps down and one left of the shed in the back yard. The trust in
the financial system has been hard won over many years.
Last week the European central bank introduced a whole host of unusual measures to kick start the economy. They
introduced a measure to lend money at negative interest rates to commercial banks. They reduced the deposit rate
commercial banks receive from the central bank to minus 0.4% and lowered the benchmark rate to 0%. They will even
start buying corporate bonds. To what end I ask.
I think it’s not all that surprising that the TSX Gold index is up, gaining 45% since the start of 2016. It should take a bit of
a breather, but the market has become very strong for this sector. One should consider having a small portion of ones
assets in gold shares as I find the negative interest rate policy bizarre and gold and gold companies tend to perform well
anytime there is reduced confidence in the financial system. For Canadian investors, just holding a broad index fund
does include an allocation to gold mining companies.
A few years ago when I was in London I went to the British Museum. It is a phenomenal monument to human history.
They had a great exhibit on historical forms of money. As my wife knows, I get excited about anything that has to do
with money. I noticed that all of these forms of money had one important thing in common – we don’t use any of them
today. The majority of the world’s currencies that existed in 1916 no longer exist in the same form 100 years later in
2016. Of those that remain they have lost virtually all of their value. The Bank of Canada has produced the chart below.
(Source: Bank of Canada, A History of the Canadian Dollar.)
Most people consider cash to be the safest asset, but one must remember that its value is being constantly eroded.
Now let’s look at the TSX Composite in Canada, a supposed risky asset. It has maintained its value more reliably than our
Cash is an okay short term asset, but a bad long-term investment. With governments around developed world pursuing
zero rate and even negative rate policies our confidence in currency should be decreased. Tangible assets, including
shares in business, should continue to outperform over a long term time horizon and a few gold shares in case
something strange happens won’t hurt.
As always I am available for any questions financial or otherwise at 306-385-6261 or by email firstname.lastname@example.org