I Have To Pay The Bank To Hold My Money?

Shouldn’t it be that I get paid interest when I deposit money?  Yes, normally however there is always another historic first event and today it is that the Greeks are having to pay the bank if they want to deposit money.  Ironic because just 3 1/2 years ago, interest rates were closer to 10%.

This phenomenon isn’t just a Greek thing though.  Since the financial crisis of late 2008, “negative interest rates” (when you have to pay a bank to hold your money) have been used by a few countries, to encourage people to spend and / or invest their money.  Doing so, spurs on economic growth.  You aren’t going to keep tens of thousands or even hundreds of thousands (or million+ ?) you have in cash, in your house or buried in the backyard are you?  Everyone needs a safe place to store their loot and that is why people pay the cost of a negative interest rate.  Today there is about $16 trillion dollars of global debt with negative interest rates.  People are so risk averse that they’re willing to lose money by way of negative interest rates (pay rather than collect interest), rather than find an alternative investment.  That can be a necessary evil for short term savings but imprudent for long term investment capital.  

The other side of that coin is borrowers and that flip side is truly, exactly the opposite.  Borrowers actually get paid to borrow money.  Sounds crazy doesn’t it?  I take out a mortgage on a house and the bank pays me?  Seems like a slam dunk thing to do but the reason people are reluctant to do that in a deflationary environment is that the asset you buy could be falling in value faster than what you are paying.  Again, the purpose of the negative interest rate is to encourage spending and / or investing to move the economy forward. 

Interest rates (the cost of money) is the most powerful tool Central Banks around the world have to heat up or cool economic growth; inflate or deflate.  The current trend of negative interest rates is to ward off deflation.  The whole world experienced deflation throughout the 30’s.  Modern day Japan knows all about deflation.  They have been trying to turn their deflation environment around for almost 30 years.  They had real estate prices falling by 70% through to 2002.  Since that time they have finally just come back up to where they were in 1989. 

That is what the tool of negative interest rates is used to avoid; a deflationary environment.  Trump even Tweeted about a month ago that the Federal Reserve (the US Central Bank) should lower interest rates “to zero, or less”. 

I remember a Portfolio Strategist, who I followed closely in the early / mid 90’s and advised on the economic big picture for tens of billions of investment dollars.  His thesis was that interest rates would go lower than what we had ever seen in history.  Over almost 30 years, his thesis played out.  More recently, another portfolio management team leader who oversees approximately $70 billion of investment assets (my client’s included in that) has been saying for the past 10 years that the debt the world has accumulated through a borrowing binge, will take decades to unwind.  It’s been 1 decade so far. 

So what do you do with all of that?  The best way to not only survive but thrive in a very slow growing economy is to invest in a global portfolio of businesses.  These business must have:

1)  Consistent earnings which have risen over time.

2)  A “moat”.  I’m not talking a deep ring of water around it but rather a unique product or service that is really hard to compete against and because of that, can raise its prices more than what anyone else can, for their product or service.

3)  A bullet proof balance sheet.

 Buying pieces of these businesses at prices that takes into account for poor economic times and yet can still produce an above average, long term return is really the only secure place to hold the majority of one’s wealth.  This includes infrastructure businesses, who have long term contracts that assures them (and their investors) that the income stream coming to them, is set for many years, thus making them immune to deflationary pressures.
PS.  No country is immune to this possibility and the ramifications of negative interest rates, not even Canada.  In fact, Canada has one thing that makes it very vulnerable to global recession, very slow growth and even deflationary pressures;  it is an economy still heavily reliant on selling commodities.  Which is why I said that a “global portfolio of businesses” is a must.

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