Negative Interest Rates?

     At the time of this writing, I have read that there is about 15 trillion dollars worth of bonds issued worldwide that yield less than zero percent. This means that the borrower gets paid to use someone else's money. It shouldn't be like that. Just for clarity, if I borrow $1000 from you and promise to pay back $900 at a later date, that is a negative interest rate. How did it get like this? Many foreign countries are desperately trying to goose their economies by lowering interest rates. Each time rates are lowered, the effect is just not enough stimulus. Eventually the central banks of these countries reached zero rates and even lower in an attempt to ward-off a recession. Who is crazy enough to lend money that is sure to result in a loss? Apparently, lots of bond market professionals. When the price of a bond goes up, the yield automatically goes down, therefore, lots of people think that bond prices are still going to rise even though the yield is less than zero. Prices can continue going up because there is just too much money sloshing around in the world these days looking for a place to land. One systemic problem in countries like Japan, Germany, and France is that they have an aging population with lots of retirement savings and little need for consumer products like furniture, cars, electronics and appliances. Demand for these items keep factories busy. Currently many countries produce more than they consume, resulting in the need to export products to other markets. Without markets for these goods, factories will shut down and workers will be laid-off, possibly causing recession. I don't know how this will all end but I know it will end badly. Eventually all the tools in the Central Bankers' toolbox will fail to work and the world will slide into recession. Hopefully, the black hole of negative interest rates will not reach the shores of the United States, but some pundits are already predicting it will. I have disliked bonds for a very long time and like them even less now. I would rather be an owner than a loaner, that is why I prefer stocks to bonds. Stocks represent ownership in some of the healthiest companies in the world. When I see things get dicey, I like to buy stocks that are defensive in nature-like drug companies, utilities, and consumer necessities. People will continue to take their medicines, cool and heat their homes, and buy toothpaste and toilet paper until their out of money.

Liquidity

     Many years ago, when I worked on the factory floor of a filthy aluminum smelting facility, a fellow worker came in with some exciting news for his close friends. It seems that his wife worked for a life insurance company across the river and they were willing to sell company stock to willing investors. Several of my co-workers bought considerable amounts of stock based on the bullish comments of their friend. They bought the stock directly from the Chief Financial Officer (CFO) of the company, thereby eliminating the need for a stockbroker. Sounds great, right? Inside information about a small and growing company that someday may become another Prudential or Mass Mutual. Not exactly! The main problem with this investment is that the stock was not listed on any public exchange. In order to sell these shares, the holder would have to find a willing buyer himself, maybe even by placing an ad in the newspaper. In other words, the stock was illiquid. When things go bad or when I want to cash-out I like a nice easy way to exit a position. When a company has to sell its stock by solicitation, it usually means that they cannot or will not comply with the listing requirements of the exchange. Not all illiquid investments are bad, assets like precious metals, real estate, even CD's are designed to be held long-term. Scamsters often prey on unsophisticated investors with "private equity" and the results are usually a disaster for the holder of such stock. A better way to play this game is to buy an experienced company that invests in startups. These are called Business Development Companies or (BDC). This gives you the benefit of owning a piece of many small and growing companies, giving diversification, and liquidity by owning a publicly traded stock. Concerning the life insurance company- they were not required to provide investors with any financial statements that were audited by GAAP standards. There also was no analysts who covered the company and rendered an opinion about its investability. Basically your flying blind, handcuffed and upside down. Needless to say, many of my co-workers lost their entire investment in this company, but the lessons they learned lasted a lifetime.