April 17, 2015
Sovereign Valley Farm, Chile
Let’s talk about idiots.
Somewhere out there, some absurdly well-paid banker just placed his investors’ capital in yet another financial instrument which is guaranteed to lose money: Australian government debt.
47 investors participated in the Australian government’s $200 million bond tender; the participants typically bid the amount they’re willing to pay, and the highest bids win the auction.
In this case, and for the first time in Australia, every single one of the 47 bidders offered a price so high that it implies a negative interest rate.
Even the lowest bid in the auction, for example, implied a net loss… or an effective yield of NEGATIVE 0.015%. The highest price implied a yield of negative 0.085%.
What’s really bizarre is that this particular issue was for ‘inflation-linked’ bonds. Which means that if the government’s official monkey math shows that inflation is falling, the yield could actually become even MORE NEGATIVE.
Insane? Of course. But here’s the thing. These bankers aren’t investing their own money.
It’s not like some guy is taking his million dollar bonus and saying, “Hey I think I’ll go buy some government debt that guarantees I’ll lose money.”
No. He buys a Maserati. Then he picks up this garbage debt with his customers’ money.
Not only is this idiotic, it’s borderline criminal. At a minimum it’s seriously unethical.
Banks and other money managers have a solemn obligation… a fiduciary responsibility that comes with the sacred charge of safeguarding other people’s money.
Just like the golden rule, this obligation is very simple: take care for other people’s money even more than you care for their own.
But that went out the window a long time ago.
Back in the 1500s, Renaissance-era merchant bankers risked their own capital alongside their customers, doing meaningful deals that financed exploration and the expansion of world trade.
Now it’s all about commissions, obtuse regulations, and following the latest banking fad.
This is officially now the latest banking fad—buying government bonds at negative yields.
You’ll remember a few years ago when the latest banking fad was handing out no-money-down mortgages to dead people and unemployed bus drivers… or buying “AAA-rated” bonds which pooled these subprime loans together.
That didn’t exactly work out so well. Neither will this.
In fact there are plenty of similarities between today’s negative interest rates and the early 2000s housing bubble.
Back then, banks were essentially paying people to borrow money. They offered the least creditworthy borrowers absurd amounts of money which sometimes even exceeded the purchase price of the home they were buying.
102% loans were not uncommon back then, which financed the entire purchase along with the extra closing costs. We even saw 105% loans which allowed a little bit extra to make home improvements.
It doesn’t take a rocket scientist to figure out that it’s criminally stupid to pay someone to borrow money.
Yet that’s exactly what’s happening now.
Instead of people, though, it’s governments who are effectively being paid to borrow.
We all remember last time how much this impacted the global financial system. Everyone believed that it would all work out OK. Then one day it didn’t. Lehman Brothers went bust, and the entire banking system started to collapse.
There’s very little difference between then and now… and very little reason to expect a different outcome.
Only a fool believes that this time is different.