“Don’t you miss interest rates?”

– JIM GRANT, founder, Grant’s Interest Rate Observer

“The entire (financial) industry mindset is wrong here. And it’s a trap. When you promise something you can’t deliver, you structure your portfolio in ways that will kill you.”

– ERIC PETERS, author of the Weekend Notes newsletter read by investment managers controlling over $800 billion in assets.


– In the 1800s, the Colt 45 pistol was known as “The Great Equalizer”. Today, the great equalizer might be interest rates—or the lack thereof. When rates are zero, the same amount of cash flow is produced on $10 million as on $10 thousand. When rates are negative—as they now are in so many countries—the greater the wealth, the greater the loss.

– Big government and big companies (or at least their senior management) are the big winners in a zero interest rate policy (ZIRP) environment. Heavily indebted governments can borrow for free—or even earn revenue—due to negative interest rate policies (NIRP). Large corporations use cheap debt to buy back stock and inflate stock options for insiders.

[drizzle]– The losers from ZIRP and NIRP are retired or soon-to-be-retired investors. Also, pension funds and insurance companies suffer based on their need to achieve returns high enough to fund their liabilities and contractual commitments. (4% is the new 8%!)

– Due to high current valuations, stocks and real estate can’t save the day for either retail or institutional investors. Formerly bubbly asset classes—like luxury condos, fine art, collector cars, small-cap stocks, and even commercial real estate—appear to be deflating or are poised to.

– Bear markets in MLPs (pipelines and other mid-stream assets), Canadian REITs and emerging market debt gave investors another shot at double digit yields. However, most investors appear to have missed the window based on heavy redemptions out of these depressed securities. (MLPs and many Canadian REITs are up 30% or more in the last six weeks.)

– $70 trillion in financial assets held by American investors is likely to produce 4% or less over the next five to ten years. This compares to a historic level of around 8%. The difference amounts to $2.7 trillion less of portfolio return for the US economy, with Baby Boomers being particularly disadvantaged.

– Many pension plans still assume 8%-type returns with little chance of achieving that due to NIRP and ZIRP. Insurance companies are imperiled as a result of the interest rate collapse and their guarantees on existing policies.

– Interest rates are now the lowest since at least the Middle Ages and probably back to when King Tut was a pharaoh not just a museum exhibit.

– Despite—or because of—NIRP and ZIRP, economic activity around the world continues to disappoint. This is likely to get worse as boomers, the largest global population cohort, become fully cognizant of their compromised income condition.

– There will be more opportunities to secure high returns—such as was the case with MLPs, Canadian REITs, and emerging market debt recently—for those investors who are prepared and have the courage to buy into panics.



By David Hay, Chief Investment Officer

It was often said back in the Wild West days of the 1800s that God made men but Sam Colt made them equal. This was, of course, in reference to his iconic pistol, the Colt 45, with the ironic name of The Peacemaker (The Widowmaker would have been more appropriate). It also became known as the Great Equalizer because whether you were a wispy five-footer or a brawny six-footer, this lethal six-shooter rendered you equals in a gunfight.

In today’s bizarre investment world, where so many things are upside down, the Great Equalizer is interest rates—or, more accurately, the lack thereof. If interest rates are zero, holding $10 million in cash is no advantage, from an income generation standpoint, than having a mere $10 thousand. If rates are negative—as they are in Japan out to 10 years in their government bond market—the man or woman with $10 million loses more!

Or think about it from the standpoint of a government. The more indebted it is, the more it makes. Again, Japan is the perfect case study. It has by far the greatest amount of government debt relative to the size of its economy than any other developed country. For years, it has been assumed Japan had dug itself into an inescapable fiscal debt hole with no way out. But now what was literally a massive liability has turned into a major asset. Those trillions of IOUs are currently generating positive cash flow! Debt trap avoided; problem solved. Who knew it would be such a painless solution?

Based on the foregoing, and so many almost incomprehensible developments, it’s clear the planet’s financial system has truly arrived in a land that Lewis Carroll might have created. However, I’m sure Mr. Carroll never had the investment scene, circa 2016, on his mind when he wrote lines such as “Why, sometimes I’ve believed six impossible things before breakfast,” as the Queen said to Alice in Through the Looking-Glass. Yet, these days, the impossible things just keep adding up.

As hard as zero interest rates are to believe—after all, this means US investors in cash, for example, have been losing money net of inflation for some seven years—negative interest rates take the absurdity to an entirely new level. It’s not just Japan that is employing a negative interest rate policy (NIRP). Per recent EVAs, nearly 40% of the so-called “rich” world is using some form of NIRP.

The theory behind such radical monetary measures is that eliminating, or even inverting, interest rates is a sure-fire way to stimulate over-indebted economies. This is because the normal adrenaline boost of cutting rates no longer works when rates approach zero. The kissing cousin of zero interest rate policy (ZIRP) and NIRP is another acronym: QE, the now legendary quantitative easing. QE has been used for years to circumvent the limitation on central bank effectiveness at the “zero bound” for interest rates. In reality, we’ve now had years and years of QE experimentation in the desperate attempt to fend off the drags of too much debt and too little growth.

A question that is fair to ask at this point is: How well has it been working?

Big government, big companies: big winners. Warren Buffett’s sidekick in multi-billion dollar wealth accumulation is Charlie Munger. One of Mr. Munger’s pithier truisms is “Show me the incentives and I will show you the outcome.” When it comes to the inverted world of ZIRPs and QEs, that epigram is particularly relevant. Consequently, for heavily indebted governments—who are strongly incented to grind interest rates to nothing, or less—the outcome is glorious, with Japan being the poster government in this regard.

For stock option-laden corporate executives, zero and negative interest rates are also wonderful. They allow senior management teams to issue debt at negligible costs and use the proceeds to buy back their own stock, pushing its price up and enhancing the value of said stock options. One of the realities of the stock option game is that, once vested, these are typically exercised and sold. In other words, insiders generally take the money and run. So unusual is an “exercise and hold” that they are actually considered to be insider purchase transactions.

The point is, the beneficiaries of stock option largesse rarely

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