Real Rates?

The records for negative rates of interest across the sovereign debt world just keep on falling. The front end of the Spanish yield curve is now in negative territory, Spain, a country whose banking issues threatened the very existence of the Euro just 5 years ago, now is charging creditors for the luxury of lending them money. Italy, the bastion of quasi-socialism and who is currently threatening to leave the EU, has rates on the front  end threatening to dip into negative territory. These types of “lending” rates defy any kind of logic and what defies logic even more is that fact that the EU is promising more of the same if economic activity doesn’t pick up. If the definition of insanity is doing the same thing over and over and expecting different results, negative interest rate mortgages (something now being offered in Denmark) might signify new levels of delusion. The question for investors is So What? In a world where the “risk-free rate” of return offers no touchstone as to where real safety or value may lie, what’s an investor to do? This question becomes particularly acute as the race to the bottom in rates is intimately tied to a competitive devaluation amongst the largest global economies. Who needs to even feign interest in a strong currency when one can borrow at negative rates of interest. The bottom line is that with both rates and currencies completely untethered from both reality and reason, it behooves investors to align themselves with an asset class which will maintain portfolio stability given the likelihood of a re-pricing of risk. We believe that the ultimate winner in this new environment will be Commodities/Hard Assets.