There is a development in the markets that will ultimately impact all of us - the rates charged by commercial banks on items like car loans and credit cards carry a huge spread to the official rates targeted by the central banks (at least times 10, for good borrowers).
Interest rates were always free market, and now the central banks are trapped. About 30% of the bonds issued by governments and companies worldwide are trading at negative yields, which is about $17tn of outstanding debt. This means you loose money if you hold them to maturity.
The scheme works like this: say you hold a $100 bond, maturing in one year with a coupon payment (interest) of 3%. At the end of that year you will be paid $103 by the issuer. But the bond is trading in the market for $110. This means that whoever holds it, needs to get rid of it before it matures, or he will loose money.
Trading these bonds is a game of musical chairs and nobody thinks twice as long as the rates decline. This is possible as central banks buy government debt, if they stop and even slow down, where is the bid going to come from? The rates in the real world show that there is a shortage of liquidity, which makes perfect sense – with low interest rates you need to spend less and save more for retirement.
The European Central Bank is in the 10th year of Quantitative Easing, meaning pumping fresh money into the economies, and they have failed to reach their inflation targets. They are not even close.
One more thought to close the topic – in many countries pension funds must invest into the negative yielding government bonds (the proportions vary). Which means a guaranteed loss – it simply just became another tax.
Now, to the good side of life. I had a nice lunch with a friend of mine, who looks like the actor John Goodman who just skipped a meal.
Rumor has it that he owns the legendary dress Marilyn Monroe wore when she sang that famous “Happy Birthday” to JFK.
Actually I just made it up, but I think it may be true.
He held up his glass of red wine at the end, looking at the great river and said:
“if this is not nice, I don’t know what is.”
In an unrelated thought he said: "I enjoy fake science. If a piece of news starts with the sentence “according to a recent study...” I am listening to the whole nonsense with enthusiasm."
That was after he finished the wine, putting him in philosophical mood.
“Sometimes you’re ahead, sometimes you’re behind – the race is long, and in end it’s only with yourself.”
“What do you think?” he leaned over the table.
“About the nature of this conversation or the nature of you?”
“Take your pick.”
“There is only one rule in this jungle – if the lion is hungry, he eats.
It’s called life.”
“Exactly”, he said, “we’re all in it. Working hard to eat, not to be eaten.”
“Women make it right”, I said.
“Life wouldn’t be bearable without them, hell if I understand how they do it.”
Tom Kubiak is the author of The Traveler