Insights

If something costs nothing is it worthless?

If something costs nothing is it worthless?

“The best things in life are free But you can keep 'em for the birds and bees Now give me money (that's what I want)”

'Money( that’s what I want)' written by Berry Gordy and Janie Bradford in 1959 The Beatles Version Money (That's What I Want) - YouTube

Banks in Denmark now offer 20-year homes loans FIXED at 0 percent. If money is free is it worthless?

While negative yielding bonds are not new, estimates are that over 1/3 of outstanding Government bonds already trade at a negative yield, the negative borrowing rates have been restricted to Governments and large corporations. From what I can tell, the 0% fixed 20-year mortgage is the lowest ever.

Mortgage rates have been trending lower with bond rates for several years, with Central Bankers cheering the lower rates and advising consumers to shop around for better mortgage deals as rates have continued to move lower.

The issue has been that borrowing rates have continued to go lower, perhaps indicating that Central Banks never expected rates to be where they are today. If Central Bankers have continually underestimated the extent of monetary stimulus, is there any hope for those just looking to buy their first house?

"A much less remarked upon fact is that the average mortgage rate paid in Australia has fallen since August last year, as lenders have increased their discounts. I encourage anyone with a mortgage to shop around: there are some very good offerings out there.” (RBA Governor Lowe September 2018)

"All I can do is encourage people to shop around. If your bank has not passed this through, then I encourage you to go and look for a better deal somewhere else." (RBA Governor Lowe June 2019)

"It's actually a good time if you're a first home buyer to buy the property that you've wanted. Interest rates are low, they're going to stay low." (BA Governor Lowe December 2020)

The impact on financial assets of lower rates has been well documented but is now over a decade old. Financial assets benefit from lower rates and lower inflation. Interest rates are at all time lows, the amount of global debt is at all time highs and growth has been trending lower even before the pandemic. It begs the question, is the system now broken?

Crypto currency advocates will all say that the recent rally in Bitcoin (et al) is the clearest sign that the system has broken. Digitalisation is more than just Crypto and we can expect countries to eventually follow China’s move to digitalise their currency. This will represent a once in a lifetime change in the way authorities can direct policy.

Quantitative Easing (QE) new

We have moved to the new QE world where it is not just a monetary phenomenon, but QE is now combined with fiscal spending. This is a new world, and the impact of QE and fiscal spending comes with a higher probability of an inflationary outcome. Inflation is what can and will move rates higher. US 5-year real rates. This time it's different

Source Board of Governors of the federal reserve System

QE and wealth distribution.

Post the end of the pandemic, Governments may become much more focussed on the QE impact on wealth inequality. Tax policy changes are likely in the medium term, that benefit lower paid workers.

Real asset inflation not just financial assets.

Commodity price rises are one element of the likely increase in real asset inflation, but for inflation or reflation to take hold and benefit the community, wages need to rise. How can this happen when record low global unemployment in recent years was unable to generate above average wage increases? Legislation increasing minimum wages may be the response once the pandemic has passed.

A quick note on the Biden legacy. I believe the consensus that fiscal spending and an easy Fed will dominate is too simple. As it is highly likely Biden will be a one term president, if he wants to leave a legacy he has to act quickly. He has experienced the difficulties the Obama administration faced, and I just wonder out loud if his agenda is more radical than is generally discussed and there are plans on how to implement. If his legacy is to be a ‘change’ President, then he is likely to focus firmly on the rights of workers not corporations.

Conclusion

Is money worthless? It might be priced at zero but ask people to give up money and most will push back. It retains a store of value characteristic but growth in that value cannot come from simply holding money, given record low rates. Demand for negative yielding fixed income assets tends to represent various forms of safe havens (as an aside, is it still fixed income if you are guaranteed to lose money?). Reflation and inflation are the key as they can undermine money’s role as a store of value. The return of inflation will require a combination of all of the above.

Finding realistically priced real assets should be investors’ focus.

David (Bushy) Nolan

Beckon Capital Pty Limited (ABN 49 628 013 678), authorised representative No. 001280538 of Fundhost Limited (ABN 69 092 517 087, AFSL No. 233045) (“Beckon”)