Tuesday, July 24, 2012

Negative interest rates: a sign that investors are more concerned about return "of" than return "on" their money

As negative interest rates on government bonds appear more and more frequently, it confirms that investors have shifted into a mode where they are more concerned with the return "of" their money than the return "on" their money.

That investors would shift into this mode is not surprising as it is a well known consequence of pursuing the Japanese model for handling a bank solvency led financial crisis. Japanese investors have been engaging in this type of investing behavior since their financial bubble burst in the late 1980s.

Why do investors focus on return 'of' their money to the total disregard for return 'on' their money?

Because they know that all risk asset values are manipulated and do not reflect what the assets would be worth if the government would reduce its involvement in the financial markets back to simply regulating the markets.

For example, everyone knows that that banks are carrying zombie loans that would need to be written off if the regulators did not allow the banks to engage in extend and pretend.

For example, everyone knows that the yield on government bonds (and in the US, agency mortgage backed securities) are artificially lowered by the central banks...quantitative easing.

When investors know that the price of everything is manipulated, it is very difficult for them to assess the risk of any given investment.  As a result, they simply invest to preserve their capital.

No comments: