The European Central Bank is now charging negative interest rates- currently at -0.4%. - on its debt instruments. Why would an investor pay an institution to hold its cash at a negative return? Cutting interest rates was initially used as a stimulus to investment and employment across Europe. But now there does not seem to an end to the downward spiral. This poses a dilemma for the typical German saver, who typically shuns equities for the "safety" of government bonds and bank savings accounts:
"Auch die Kapitaleinkommen der privaten Anleger sind erheblich vom Zinsniveau abhängig. Vom Geldvermögen von mehr als 6 Billionen Euro werden etwa drei Viertel in Form von Bargeld, Bankguthaben, Anleihen sowie überwiegend in Anleihen investierten Versicherungen gehalten. Der Aktienanteil beträgt nur rund 6 Prozent."
One would think a rational investor would change his/her behavior in the face of ruinous yields and at least diversify an investment portfolio with stocks. But that doesn't seem to be happening. German savers are stubbornly risk-adverse.
While retail investors are primarily "buy-and-hold" savers - in for the long haul, many institutional investors are active traders, which is now leading to a dangerous spike in bond prices:
Die Kurse von Bundesanleihen und anderen Staatsschuldtiteln schießen kräftig in die Höhe, die Kurscharts erinnern fast schon an heiße Technologiewerte. Und so kommt es zu dem Paradox, dass man plötzlich mit Staatsanleihen kräftig Geld verdienen kann, und das auch in der Null- beziehungsweise Minuszins-Ära. Besonders kräftig legen die Papiere mit langer Laufzeit zu, weil sich hier die Änderungen des Marktzinsumfelds besonders kräftig im Kurs niederschlagen.
In fact, the anticipation of further rate cuts by the ECB is driving bond prices to bubble territory. And we all know what happens to a bubble:
Tatsächlich erinnert das Kaufverhalten an eine typische Blasenbildung. Ist es im normalen Wirtschaftsleben so, dass die Nachfrage nach einem Gut oder einer Dienstleistung mit steigendem Preis zurückgeht, gilt das nicht für einen Markt in einer Bubble.
Negative interest rates could contribute to deflationary environment, which - as we've seen in Japan - is hard to reverse, or even control Once deflation takes hold, a severe recession would surely follow. Also, German savers begin to believe that the ECB is punishing them for their frugal ways, further turning popular sentiment against the EU. The political winner in such a scenario would be the far-right populist Alternative für Deutschland (AfD) party.
It will be interesting to see what the ECB does in case of a severe stock crash. The usual thing would be to flood the markets with cheap money through lower interest rates, but would it help in future? What could they do else? Give every European a 10,000 € Amazon voucher?
Posted by: Koogleschreiber | August 12, 2019 at 11:50 AM
By the way, I'll begin to accumulate Russian raw material stocks over the next years. The outlook by the IMF is moderately good for Russia, the Russian stock market is relatively immune to other markets in the world. Best of all, Russian stocks pay real high dividends. Second best: The man in the street doesn't care about Russian stocks, I think this is a buying oportunity.
Posted by: Koogleschreiber | September 24, 2019 at 04:40 AM
Good luck with Ruble-denominated dividends.
The problem with Russian (and Chinese) companies is a total lack of transparency. Who can believe the numbers they provide?
Posted by: David | September 24, 2019 at 10:27 AM