Trading negative interest rates

I wish I could do that but I think I couldn't handle the stress of these positions, knowing that I didn't believe in them.

 

The precious metals is a horrible way to play it. Since the time Jesus walked the earth, Gold has rallied maybe less then 1% of the time in a rising rate environment. Higher rates in the US will lead to a stronger dollar which will crush Gold and the miners even more. I can't think of a worse trade. You really don't want to be long any commodities in a strong dollar environment (hint....we are in one now).

 

That is your opinion and you exaggerate once again.

I have enough dollars so I am defacto long the dollar. I can produce more dollars by my day-to-day trading. I need some protection from the idiotic central banks running the asylum. Gold fits that bill nicely.

You may view gold as a commodity but it is also a currency that can't be debased. You get no interest from holding gold but then you get no interest holding fiat currency currently. I prefer gold.

And finally, when interest rates finally rise, I suspect it will be because the faith in central banks will be gone and that will be a perfect time to own precious metals.

 

It's not an opinion,it's based on 1000 years of empirical data. But we'll leave that aside. One issue you have(and many here have) is you are making emotional decisions, not empirical ones. You hear this when people say things that have to deal with their hate for the Fed, the President, their country, etc. These are not well thought out trade ideas, they are emotional ones. If US rates go up,it will take a dollar that is already crushing all the other currencies around the world and simply make it even more attractive. Think this through. If you are a European Bank, you can buy US assets (debt or equity) that pay either a higher yield with a stronger currency in the tail. You also have the benefit of owning the most liquid asset in the world if you choose, US Treasuries.

In my humble opinion the Fed is deeply concerned about the dollar strength and I think it's one of the reasons they have been so reluctant to raise rates. A strong dollar is deflationary every in the world including here and we have a world economy with virtually zero growth. One of the reasons why I think the short rate trade won't work is I actually believe rates will go even lower and for even longer then most people think.

Japan has kept rates at zero now for over a decade. I think the US is going down that exact same path. What's driving this lack of growth? Part of it is cheap outsourcing of labor. Labor growth and wage growth has always been the fuel that lit inflation. There are just far too many countries still around the world willing to supply cheap labor. Another part holding inflation down is technology. Technology makes us more productive. We can make more widgets at lower unit costs and with economies of scale. Third....debt. Debt by definition is deflationary. Money borrowed today takes away from tomorrow's consumption, that means forward expectations for inflation are lowered which reverberates in the yield curve. Also debt at the federal level means countries are tied from using expansionary fiscal policies to stimulate growth. This is not good. We have now removed virtually every possible source of growth. This is not an environment where I would want to structure trades to get long rates.

BTW, this is why central banks around the world have resorted to using their last bullet, currency rates. Since they can't lower rates effectively, they have to lower their exchange rate and this is why we have a race to zero in the currency war. But the dollar is bucking that trend. It's actually going higher while everyone else is taking theirs lower. This means the US will have no ability to export goods. It means the oil we produce in the US is not competitive when priced in dollars. There is NOTHING, absolutely nothing that points towards any kind of real growth. We are actually worse off now then Japan was at the beginning of their "lost decade". Add to all this the declining birth rates not only in the US but all G10 countries. Notice how China lifted their one child birth policy to stimulate growth.

This current economic environment is both fascinating and frightening at the same time. It's highly deflationary. And outside of war, there appears to be no catalysts. One of the best ways to analyze your trade is to look at Japan and see what worked in that lost decade. The answer...real estate. Japanese poured all their money into real estate instead of the stock market and instead of the bank.

 

OK the other side of this statement is that rates could go up and the dollar down. If many countries are trying to debase their currencies at the same time, who's to say they won't all panic and try to protect at the same time? Also if one says the dollar is going up now because of the idea of higher rates, what happens when rates actually rise?. Or are we just relatively higher? I remember the 70's where the economy stunk and rates were high.
Anyway, I like the idea of the original post, which to this trader says try to find a way to profit from the eventual reversal while getting paid to wait. Key word being eventual. I'm thinking of it from an equity or business standpoint. I can tell you firsthand that trucking rates are stinko right now. I cannot think of the upside. But its there.We just can't see what we can't see. It will happen though that in the middle of a recession I'll pull up at midnight to some site and they will want the stuff right away so the third shift guys can have it ready for someone asap. Then you know you're on to something.

 

The other side of this is that money borrowed today may never get paid back. What effect does that have on interest rates? Hmm let me check my economics textbook. Nope, doesn't talk about it. Wonder why?

 

We have to look at cause and effect here. Rates did not simply just go up. We had a supply shock in 1974 that echoed throughout the decade. Paul Volker took short term rates eventually to 15% to cut the head off of inflation and it worked at the expense of putting the US into a recession. So the higher rates did not cause inflation, they were a response to it. There is very little chance the dollar would go down with higher yields. Again, just think this through. And yes, we are talking relative as with all things economic. If US rates go higher relative to another currency, especially with stable inflation, then other countries will buy our debt and our assets to get the higher yield pushing the dollar higher.

The alternative for them. Say you are a European bank. You decide to hold Euros instead of dollars and you decide to stay in Bunds that pay negative yields vs Treasuries. You are losing the opportunity cost of higher yields in the US while at the same time watching your currency depreciate against the dollar. No bank in the world is going to do that.

Here is an interesting point about Japan. One of the things that kept Japan alive for two decade is while they were exporting goods all over the world due to their cheap currency, they were building up massive currency reserves in "other" currencies. They used the income from these other currencies to purchase higher yielding debt and generated enough income to actually support their economy.

And I'm not sure I understand your currency panic example. These other countries are "panicking" from a higher currency, not a lower one. These poor countries around the world have to sell their goods to richer countries. They have no local demand. A higher exchange rate prevents them from doing that. Everyone around the world is pushing the dollar higher. I don't think the Fed will play along. But the Fed is not panicking just yet, they will let the dollar go modestly higher.

 

Thanks for the informative post. I agree with a lot of things you are saying. Interest rates will probably fall farther and longer than people think. However, my time horizon here is say 10+ years. And unlike you, I do not have faith that the US government will always be seen as a safe haven (USD or treasuries).

You seem to have little respect for gold, yet you are saying every country is resorting to weakening their currency. If I own the two strongest currencies (USD and gold), how is that a bad strategy?

In my personal life, there is no deflation. So there is very real inflation in most everything I consume (groceries, medical bills, property taxes, electricity bills, water bills) except for maybe gasoline. I have total contempt for what the Fed has done. My opinion is that this all ends extremely badly for everyone.

Investing in real estate is definitely an avenue to pursue. It is not in my nature to buy multiple properties so I would have to express that with some other instrument. However, I wouldn't say real estate is depressed in price currently so that ups the risk factor.

 

Yes, it is in there. It has the same effect. If I owe you $10, then it's a liability to me and an asset to you. When you get the $10 back, you can buy junk with it. If I default, sure I save the $10 but now you don't get it. The effect is the same. The difference here is when banks get repaid on loans they don't buy goods with the proceeds driving price levels higher. They loan the money out again. So if you don't pay the money back to the bank, the bank can't lend that money back out to another person who would spend it. It doesn't help you at all if you are broke, you are not a spender anyway. You get demand destruction which is deflationary.