EDITOR'S LETTERMerryn Somerset Webb
Markets are getting strange
It is getting seriously strange out there. A decade ago it would never have crossed even the most mad of monetary minds that the great credit bubble of the early 2000s would end with interest rates actually being negative. Today it’s almost entirely normal. Just another tool in a central banker’s box.
Negative rates are already par for the course in the eurozone (30% of bonds in issue there will cost you if you hold them to maturity), in Switzerland, and in Sweden, and late last week Bank of Japan Governor Haruhiko Kuroda announced that from now on any bank that wants to keep any new cash on deposit at his institution is going to have to pay 0.1% for the privilege. Japanese rates are now -0.1%.
So who’s next? We wouldn’t rule out the US – its December rate rise is now looking a little bit silly and we most certainly wouldn’t rule out the UK. Right now we still expect the next move in rates to be up (wages pressures are building here), but the truth is it wouldn’t take much for Governor Mark Carney to decide to push his team the other way – and to turn our financial world upside down by making deposit holders pay interest to banks rather than visa versa.
How might you react? By hanging on to whatever you have that pays any kind of yield. UK dividends might be under threat. But when rates are negative any dividend at all will feel like a blessing! Lynn also recommends physical cash (no interest can be charged on things stored under your mattress – yet).
Finally, I would turn to Bill Bonner’s wise (and timeless) advice. Quantitative easing and negative rates make it tempting to just buy any old thing – just to get rid of cash deposits. But remember, he says, that the long-term key to making money is to buy into cheap markets, not expensive ones – and to hold cash when everything is expensive. You clearly don’t want to be out of a market if it’s in a long bull cycle, he says. But if it is in a long bear cycle there is really no shame – whatever the professionals might tell you – in waiting for cheap to come around again (even if it costs you the odd 0.1%).
You might have a long wait in the US regardless of who wins the election: the cyclically adjusted price-to-earnings ratio suggests it is as overvalued as it was in 1929 and 2007. But you might make money in India, you might in Japan (still one of our favourites) and you almost certainly will in Vietnam.