Why so Negative?...

When you lend money to the government by buying a Treasury bond, it’s an investment and not a favor. You expect to get back more than you put in, in the form of interest, in order to compensate you for a multitude of risks and the loss of use of your money. This makes recent news about the proliferation of negative yielding debt (shown in red below) seem perplexing.

10 year bonds pg 3.jpg

Yield and price work like a seesaw; the more you shell-out for a bond’s fixed payments, the lower the return on your investment. A negative yield implies that demand has driven the price of bonds so high that you’re actually paying to lend money. Surely, no one would take this offer – or would they?

The world’s negative-yielding debt totals a record $15 trillion today. There are a number of reasons for this seemingly irrational accumulation, but most of them have to do with at least one of two things: pessimism about the future and the desire for safety.

Many large institutions – such as pension funds – are mandated to keep a certain percentage of investments in their government’s debt, so they must continue buying regardless of price. This makes sense from a safety and liquidity standpoint. If you need money to pay future liabilities, a bond from someone who can raise taxes and print money to avoid default is a solid choice, even if there’s a chance that you’ll get a small negative return.

Another factor is the expectation of future deflation. Deflation occurs when prices fall due to a lack of demand for goods and services, usually when economic conditions significantly deteriorate. The implication of negative-yielding debt is that even though you are getting fewer dollars back than you invested, those future dollars will still have increased purchasing power as long as your return drops less than the general level of prices.

Also firmly in the category of a less-than-rosy outlook, is the chance that negative yields could continue to slide even farther below zero, making today’s small loss more attractive than a potentially larger loss in the future.

So, what can we take away from all this?

Negative rates can be a boon for some and a hardship for others. Borrowers are generally rewarded; one Danish bank is actually paying people to take out mortgages. Savers are punished by having to pay banks to hold their money or by falling short of expected returns. In general, negative rates can be seen not only as a signal but as a potential accelerator of a deflating economy, which can be hard to escape once entrenched. Negative rates can stifle investment as people without attractive options keep money in cash, but can also have the perverse effect of increased risk-taking as people reach for yield in unwise ways – both actions that can cause larger ripple effects on the system.

The impact of the current negative rate environment is unclear. It could be the spark that jumpstarts a sluggish world economy temporarily spooked by trade issues and geopolitical risk. Or it could be the sign of a new normal: slow-to-no growth in advanced economies due to underlying demographic and technological trends. Only time will tell if it’s sustainable, but for now the U.S. continues to look good if only by comparison, with economic growth and yields that remain low, but at least positive.

Market Value pg 3.jpg

Our Chocolate Recipe Pivots to the East…

Hooray - our annual Chocolate Dessert for this Holiday Season. And just to impress you with our effort, listen to this vetting process. Jordan Lafayette here at the office supervised a rigorous Test Kitchen to get to our final result. From early November two employees a week prepared a chocolate recipe. In early December we voted on the winner, and not just one vote but two. First we got down from ten entrants to three, and then the bake off to determine the final selection.

Our 2018 winner is our newest employee, Liz Ford but as they say on late night TV – wait there is more. The actual winner this year was not Liz Ford but Sven Eklof with an outrageous explosion of goo-ey chocolate wrapped in moist cake, the ‘German Chocolate Bombe.’ As with many things in life however there were issues. The big one is the recipe is somewhat involved (“It is really simple!” claims Sven) and does not fit on a Newsletter page. So alas on to Plan B but rest assured this is no step down. Liz’s pudding, “warm, spicy and exotic,”as she describes it, was a very close second in the voting and she fully deserves the baking bragging rights for the next twelve months. The “raz el hanout” spice (a curry blend) does not require a trip to the bazaars of Marrakesh (although this would win big points at your dinner party) but can be had at Trader Joe’s or other specialty stores. Arrowroot powder is available from local co-ops.

So from all of us here, a Happy Holiday and a Successful and Healthy New Year. P.S. For those wanting to throw all caution to the wind, we are happy to send along (FREE SHIPPING!) Sven’s recipe for a DOUBLE Holiday Treat.

Pudding pg 1.jpg