High yields in a world of zero yields

by Finploris
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What impact will low or negative interest rates have on the global economy in the long term?

This is what everyone wants to know. Everyone from consumers to policymakers.

And the real answer is: we don’t know.

We really can’t look back in history and say, “Yeah, that’s what happens with negative interest rates…the economy collapses…that happens every time…”

The reason we can’t look back in history and conclude that is because it’s never happened before.

Governments have never issued bonds with negative interest rates like they have recently in the U.S. and are still doing in Europe. It’s hard to imagine when you think about it. Who would lend money to a government or a company that requires investors to borrow the money. It makes you think…

It’s a smart plan by the government to stimulate the economy. If you can’t invest the money…then you have to spend it…which of course boosts the economy.

What the government economists didn’t accurately predict is that many people are saving money. Especially when it is increased with numerous rounds of Quantitative Easing.

So… back to the question… what are the long-term effects of low or even negative interest rates?

We are seeing asset prices still skyrocketing. Real estate, cryptos, NFTs, sneakers, gold, art, collectibles, and all kinds of “one-off” assets that have real physical value.

The economy has also seen a massive rise in many countries despite the Corona pandemic.

People can’t invest in things that yield them low or negative interest rates….they simply can’t afford it. They need assets with robust returns for their wealth accumulation, for their retirement.

So they take refuge in “safe” investments. Things they believe have value.

And people are still flocking to value.

But what has value?

Everything that is finite. That simply cannot be augmented, distorted, or artificially reproduced.

If we look a little further into the future and assume that asset prices will continue to rise, we can assume that asset prices will become frothy. They will become too valuable.

People will pay exorbitant prices for real estate, especially in the major metropolitan areas and the cities with strong economies.

They are understandably flocking there because they are seeking safety and yield. That’s because the long-term effects of low interest rates have led people to invest in things they believe will retain or even increase in value.

How long will this price inflation last? …Who knows…

In the short term, a smart investor might position themselves to ride this wave of price inflation and make sure they get out before the bang.

Another wise move would be to avoid anything that is already inflated due to low interest rates, such as junk bonds.

Investors are flocking to junk bonds because they offer a higher yield than regular bonds.

And… for the most part, they would be right. Junk bonds are loans that “riskier” companies take from investors. These riskier companies are not as resilient to crises or as established as a normal blue chip company. Because they are still young or have financial problems.

In other words, junk bonds can default more often.

What will happen when all the people looking for yield in this low interest rate environment fail with their junk bond investments? What will happen when investments in so-called “one-off” products no longer experience the same high demand they did before.

Your guess is as good as mine.

Most would call this situation a “crash”…. And therein lie the risks when interest rates rise and money becomes more expensive again.

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