Now That's Interesting....

Now That's Interesting....

March 28, 2024

The negative interest rate era is over – Was it the dumbest idea in economic history?”


This was a recent headline on a financial news site.  The question is referring to the nearly $17 trillion (yes, with a “T”) that was invested in negative interest rate bonds during 2020/2021.  As I wrote about extensively during that time – and provided a clear warning regarding – bonds were in a bubble that made the irrational exuberance of the internet period look like child’s play (to put it in perspective, the entire market value of bitcoin is worth less than 10% of the value of negative interest rate bonds owned just a couple short years ago).


Since that time there of course have been headlines of bond portfolios blowing up (think Silicon Valley Bank), while quietly in the corners of markets around the world, bond holders have been suffering losses like they have not seen in decades.  And I am not talking about declines in obscure third world country issued bonds.  30-year zero coupon bonds issued by the good old US of A lost a staggering 39.2% in 2022.  Long term US Treasuries lost over 29% and long-term investment grade bonds lost around 27%.  These were the worst returns for many otherwise secure bonds in US history.  Imagine the losses on bonds that had a negative interest rate issued in 2020.  So much for stable, safe fixed income.


Beyond pointing out the recent carnage in the bond markets, what is the point?  It is this: whether it is putting money into an internet or EV stock that is trading at more than 100 times sales, or parking your money in a bond that gives you the privilege of paying someone else to own it, you don’t ever have to make an investment.  You don’t ever have to take action.  Sometimes doing nothing – or just staying in something tried and true until the dust settles – is the best course of action.  All crises / bubbles eventually come to an end, often more quickly than you realize.  And things that seem too good to be true, or that have valuations that make little sense based on centuries of data, will likely end badly.  Just look at the meme stocks and SPACs of the early 2020s.  Sure, in the moment – whether based on panic or greed – while it seems like joining the party makes sense, you are very quickly likely to regret you ever drank from the proverbial punch bowls.  Will some people come away unscathed?  Sure, but why take the risks.


You worked hard for your money (or someone did), so treat it seriously, manage it carefully, or work with someone who can help you develop a plan you can stick to no matter if blood or wine is flowing in the streets.  The pendulum will eventually swing back the other way, and you don’t want to be there when it hits investors in the face who took on risks they either didn’t understand, or where in an emotional state of mind not conducive for smart long (or even short) term investing decisions.