It’s Not Rocket Science

4 Feb

Albert Einstein’s quip that ” Compound interest is the eighth wonder of the world” is really getting challenged as of late with Corporate Debt now trading at negative yields. Nestle Corporation now has a 4 year Euro denominated bond that is currently trading at a negative .0008 according to the Financial Times. Combine this with negative government yields in Germany, Japan, Denmark, Switzerland,Netherlands, and Austria and the miracle of compound interest becomes less miraculous. In fact, the math becomes downright onerous for those individuals that are  now paying for the privilege of lending. Those in the deflation  camp would point out that these types of term structures are hard evidence of deflation, but the reality is that negative rates most likely are a symptom of Central Bank induced portfolio decisions driven by concerns over  the relative safety of principal. We are not proponents of the concept of relative safety, but rather the concept of absolute safety. The brave new world of post Central Bank meddling will involve unintended, unexpected and almost certain adverse consequences. Buy Stuff

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