Finding Yield in a Subzero World

Connecting the Dots: Finding Yield in a Subzero World

By Tony Sagami

 

“It’s basically a fee for fear.”

—Nicholas Colas, chief market strategist at ConvergEx

“It’s a glaring warning sign of deflation. We’ve never really had deflationary fears throughout such a widespread part of the world before.”

—Phil Camporeale, JPMorgan Asset Management

It would have seemed impossible a few years ago. How many of us would have guessed that US interest rates would be just a hair above zero?

The sad thing is that the Federal Reserve Bank’s zero-interest-rate policy has taken away income from savers—largely senior citizens—and transferred it to stock market investors. All those years of thrift and responsible saving have been undermined by Alan Greenspan, Ben Bernanke, and Janet Yellen.

On the other hand… it could be worse.

Worse? Interest rates are even less than zero in some countries. Yes… negative interest rates.

Sweden… Switzerland… Denmark… and the European Central Bank.

What do those four have in common? The yields on their short-term interest rates are all negative.

The European Central Bank introduced negative interest rates last year. It has been joined by Switzerland and Denmark at -0.75% and Sweden at -0.85%.

You may have no plans to invest in Sweden, Denmark, or Norway, but the universe of negative interest rates extends beyond those Nordic nations. Today, 16% of the world’s government bonds have negative yields.

Yup, investors now have to pay for the privilege to loan money to governments, for example, in Germany and France.

One day we might tell our wide-eyed grandchildren that once upon a time, governments and corporations actually had to pay the lenders for the privilege of borrowing money.

For the most part, individual savers don’t have to pay for the privilege of leaving money in the bank, but institutional customers—even in the US—are getting nailed. JPMorgan Chase recently announced it will charge institutional clients as much as 5.5% on deposits, and several banks are already charging corporate clients to hold eurodollar deposits.

Think US Rates Are Headed Higher? Wrong!

Don’t forget about Mario Draghi and the European Central Bank’s (ECB) new massive €60 billion (US$69 billion) per month quantitative-easing program.

One of the most astute central bank observers I know, Joan McCullough, says that there may not be a limit to how much QE money the ECB will spend, and she wouldn’t be surprised if the central bank took interest rates down to -5%, like the Swiss after the demise of Bretton Woods.

Instead of trying to find some logic in the actions of central bankers, let’s focus on what the free-market response by banks, pension funds, and institutional investors will be.

Short-term US bond yields are barely above zero and yields on long-term bonds are near historic lows, too.

The 10-year Treasury bond yield is comfortably below 2% and the yield on 30-year Treasury bonds recently hit a new all-time low at 2.44%—the lowest yields in the history of the United States.

Let me repeat that: The lowest yields in the history of the United States.

Furthermore, the yield curve has flattened almost back to the levels of the 2008-2009 financial crisis, so while Janet Yellen may talk tough about raising interest rates… the bond market believes otherwise.

I expect long-term interest rates to head even lower. In fact, I believe the big shock will be how low they go.

Against that backdrop, the rules about investing for income are very different today than they were in the past and why I believe that 2015 is going to be the Year of Dividend Stocks. Click here to read about my favorite dividend stock right now. I recently wrote about this company in Yield Shark. It pays 4.4% a year and has also paid out $9.00 in special dividends in the past few years.

Finally, nobody can survive on a 0.25% return on their money, so you better become acquainted with dividend-paying stocks if you don’t want to work as a part-time Walmart greeter during your golden years.

Tony Sagami
Tony Sagami

30-year market expert Tony Sagami leads the Yield Shark and Rational Bear advisories at Mauldin Economics. To learn more about Yield Shark and how it helps you maximize dividend income, click here. To learn more about Rational Bear and how you can use it to benefit from falling stocks and sectors, click here.

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DC Sunsets

The ratio of what people think is wealth to actual underlying wealth is higher than any time in history. This means either that there’s a lot more real wealth than meets the eye, or a lot less perceived wealth than rests on people’s (and company’s) mental or physical balance sheets.

When you loan can after can of food to the food bank and one day go and look in the cupboard and find it bare, it’s the same thing as a “bail in.”

A bail in is simply an accounting recognition of a pre-existing reality. The wealth you thought you had was in fact an illusion you shared with the rest of the herd.

Our challenge remains: How do we act to hold real wealth, wealth that represents purchasing power and at least retains its purchasing power as the blooming roses and lilies of the Fed’s hothouse wither and die when the lights and heat run out of credit fuel.

I am baffled by the whole question, even though I can frame it.

DC Sunsets

This guy may be right, long-term rates may go lower….on some things.

In the end, however, rates will rise. This year, next year, next decade, but rise they will because there’s no way to pay the Vig on all this out of current income.

Rates are low because people are PLOWING wealth into IOUs instead of buying Real Assets (or stuffing their mattresses with cash or Krugerrands.) People do this because they TRUST they’ll get their money back.

Wait until they begin to question that assumption. People will turn away from IOUs, and their rates will rise not because people want more yield but because people begin to wonder if the IOU issuer can be trusted to give them their money back.

DC Sunsets

My guess:

Central banks are trading what spends like cash in return for IOUs. IOU prices thus remain high, and that cash is recycled back into…..buying IOUs.

At some point, however, the cash will go somewhere else, and the jig will be up.

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