Negative Interest Rates and Alternative Assets
2008 is a year synonymous with the Global Financial Crisis (GFC) and one that marked a pivotal moment in financial history. The worst economic disaster since the 1929 Great Depression, 2008 led to the capitulation of the housing market, 9%+ unemployment, and record bailouts in the billions.
While the figures and stories that emerged from the GFC are captivating, what followed is just as fascinating. The world’s major economies embarked on aggressive Quantitative Easing (“QE”), an asset-purchasing program designed to prevent sub-zero inflation and keep the economy afloat.
This tactic was met with strong criticism from many market commentators, including Alan Meltzer, Carnegie Mellon economist and Fed historian, who was particularly critical of the Fed, stating it was misguided.
“With $3.5 trillion in excess reserves sitting in the banking system, what good can the Fed do by adding to it that the banks couldn’t do on their own? The answer is nothing. Whatever has happened in the economy isn’t being caused by quantitative easing”, said Meltzer.
To understand the sheer size of these QE programs, we must look at the numbers:
– The U.S. Federal Reserve had three rounds of QE between 2008 – 2012, during which it grew their balance sheet from approximately USD800 billion worth of Treasury notes pre-recession, to USD4.5 trillion by October 2014.
– The ECB launched their QE program in March 2015 and in the four years since its launch, spent approximately EUR2.6 trillion buying up government and corporate debt, as well as asset-backed securities and covered bonds. At EUR1.3 million per minute, that’s an aggressive program.
While many argue that QE was successful in preventing a complete meltdown of the global financial system, the side-effects of such economic policy cannot be ignored. QE directly results in lower interest rates, which favor borrowers, but punish deposit holders. Unsurprisingly, we’ve seen global debt surge, with current U.S. public debt clocking in at a staggering USD22 trillion+ and negative interest rates in the Euro Zone, a policy that went live in 2014.
To my amazement, many people are shocked to learn that negative interest rates are real and profess that they never occur in other economies. However, countries with (-) deposit interest rates include:
- Switzerland -0.75%
- Sweden -0.25%
- Japan -0.26%
- Denmark -0.65%
- Eurozone -0.4%
It’s important to note that while negative interest rates are an unconventional monetary policy tool and a drastic measure, it could soon become a reality for deposit holders in Australia and the USA.
Recently, former Fed Chair Alan Greenspan stated,
“There is no barrier for U.S. Treasury yields going to below zero”.
Furthermore, the trend for negative-yielding bonds (globally) is alarming:
These low rates have been excellent for people / businesses looking to borrow, as the cost of debt servicing is cheaper than ever. However low rates have impacted retirees and anyone else looking to generate a safe return on their cash.
So, how can you earn an adequate return through a safe fixed investment?
The increasing trend of declining interest rates has led to a growth in alternative assets, with depositors looking for ways to generate safe, but adequate returns for their portfolios.
According to Preqin, the Alternative Asset Industry is primed for growth, driven by investors’ desire for yield. Preqin’s research (surveying 400 institutional investors in November 2018) had a number of interesting insights, which you can access through Nebula’s Research Hub. Of particular interest was the private debt market.
The snapshot below summarizes the overall findings well:
What alternative asset investment opportunities exist?
Alternative assets include private equity or venture capital, hedge funds, real property, commodities (such as precious metals), cryptocurrency; and debt. Which asset class you choose to invest in will determine how easily accessible it is, how safe it is, the returns it generates; and its liquidity.
Nebula Ventures offers a digital platform that will allow you to gain access to exclusive alternative investment opportunities and earn enhanced returns between 7-15% per annum. If you’d like to learn more about accessing these unique deals, please click here and join the Nebula.