Ask HN: How to prosper under negative interest rates?
The US Fed is at 0% interest rates and there is increasing speculation they might go to negative interest rates. There are already other central banks around the world in negative interest rate territory.
How do you prosper under a situation like that? What would you do or plan to do?
For example, should I stop saving? Should I put my savings elsewhere? Should I take out loans to buy up assets? Should I build businesses and raise venture capital for them?
I was brought up to work diligently, not take on debt, and save - a simple approach to building wealth - but I'm concerned that will put me at a disadvantage under an economic system with negative rates.
259 comments
[ 3.4 ms ] story [ 275 ms ] threadE.g. in a world of negative interest rates and 0% inflation just holding physical cash solves most of your problem - however that does not solve your problem in a world of positive inflation and negative rates - then you need to be able to make up the difference on asset price gains...
Interesting take. Why would you be at a disadvantage and to whom would this be in relation to? I think it's fair to say that in the very long term inflation, etc will erode the value of your cash, but I imagine that there is still value in saving. I'm not sure these rates will last forever anyway.
Negative interest rates also that you get paid for taking out debt, which is a tremendous opportunity to buy something that costs $100 for less than $100, but because OP indicated their aversion to taking on debt, this puts them at a disadvantage.
I was laughing when greek debt was issued with sky high interest rates. Since it was back stopped by the ECB some saw it as a no lose scenario. I wonder what happened to those bonds. They aren't in default afaik.
This can go the other way too. If interest rates rise a smidge, the value of these bonds can plummet.
For example, all my furniture is ~10 years old from Ikea. I’ve always wanted nicer things. The fence in the back needs some repairs. Maybe I should finally hire a contractor to fix it.
For myself, I am betting that tangible assets that provide value would be preferable to assets that just sit there. Value investing and prudent real-estate are where I'll be concentrating my efforts if I have spare money.
The most immediate value creation for most of us is to just become better developers and better understanders of the requirements of whatever we're developing.
Here's a quick example. Let's say you're in a deflationary environment: in 1 year, your money actually buys you more than it did last year, let's say for instance, 2% more. Under this weird environment, you would actually be willing to pay someone to hold your money for a year, because you know in a years time, it will buy you 2% more (effectively a 2% return). So, since you don't want to store that money under your mattress, how much will you pay someone? Let's say you pay your bank 0.5% for holding your money (i.e. negative rate). So in a years time, you get 99.5% of your money back from the bank, but it buys you 2% more "stuff" so really, compared to today, you're getting 101.5% (roughly) of your money back, which is the same as a 1.5% interest rate. This is called the "real" interest rate, and it's the only one that matters.
It's worth pointing out that this is not "weird", but rather the natural state of things! The effect is so strong in computing that we still see it, but technological progress means everything in general gets easier to produce.
This policy that "prices must always go up" is itself the aberration, instituted to keep the plebs working "full time" and to undermine their ability to save.
Productivity growth is normal-ish, but the amount you prices have been all over the place throughout history.
Deflation should be the natural order of things; for example the unit real cost of food had gone down massively since the first half of the 20th century, which is a huge part of why people don't starve to death during recessions anymore.
Yes, and it is, for existing unchanging things. But as productivity grows we invent and buy new and improved things.
I do not think it makes sense to insist that money can only ever be subjective based on the possibility that transients can occur - eg a factory burning down does cause natural price inflation, but this is an exception rather than the rule.
Except in health care, education, and real-estate - all three of which are needs more fundamental than personal computing or electronics.
A lot of economic activity is adversarial and negative-sum. In the best case it's negative-sum but a multiplier of over 1, like police work. In the worst case it's value-destroying Uber vs Lyft wars, where companies spend on guns to fight each other with, which effort is forever lost for butter. Digital marketers are the soldiers in these battles, along with lawyers and security people.
In other words, just because everyone's rich doesn't mean there won't be someone willing to pay a lot of money to get more of the pie. Which leads to good scarcity (both from a smaller overall pie and the public having less access to it) and more money flying around, and boom, inflation.
We are in this situation today.
This might be a pretty new condition for some people.
edit: for those wondering you wanna look at a Consumer Price Index (CPI) to dertemine inflation/deflation
(Obviously big businesses can't do this.)
It doesn't sound like much because we've become innured to it. But, it's really bad. Just think, you earned 100K in 1 year and 1 year later it's only worth 97K. That's a tax of 3K just for holding on to your money, on top of all the taxes that already exist (Govt spending is 40% of GDP ~ and that's just nationwide.)
After just 20 years of 3% inflation, your money is worth half of what it was when you earned it. What's the point of government if they can't even provide a stable currency? Is the expectation that everyone must now buy equities and real estate? Are we to go back to bartering?
For those who have yet to have the enjoyment of the experience: https://brrr.money/
I've seen it used in other contexts but can't quite fully grasp what is meant by it.
https://www.nytimes.com/2020/03/23/upshot/coronavirus-fed-ex... (The Fed’s Message: The Money-Printing Presses Are Fired Up and Ready to Go)
[1] https://en.wikipedia.org/wiki/Gold_standard
https://www.youtube.com/watch?v=ehFImqzVWos
2) The idea that 2-3% inflation is "really really serious" is completely absurd. I'm guessing you're young because historical US inflation prior to the ridiculous post-2009 financial situation had long periods of being well above 3% and the sky didn't fall. Inflation above what we've seen in the last decade is not necessarily a bad thing.
>The Fed considers a 2% inflation rate to be a sign of sustainable growth and a level that keeps interest rates high enough to allow for mobility in the event of an economic downturn.
For the first time in a very long time we actually have a shortage of supply. We didn't have that in 2009.
But I think/hope it will be short lived, and depending on how we act now it could easily turn into a shortage of demand once again.
If stuff doesn't get manufactured for months, we will have a shortage of many other things as well. Obviously we have a lack of demand for other things at the same time.
I don't think there is that much unreasonable stockpiling. People are no longer eating out. Kids are no longer eating at school. So people buy more at supermarkets. They also buy for a week, quite sensibly, to avoid making a trip to a crowded supermarket every day.
Combine that with finely tuned just in time logistics and you get a bit of a crunch. There's simply a misalignment of capacity right now, but there could be a real shortage of some essentials soon.
Fairly few households are interested in buying canned tomatoes 18 quarts at a time.
Gyms are closed, so go try to find a squat rack, a bar, and some bumper plates for a home gym. Or dumbbells. Or even some crappy resistance bands. You can't. Nobody is hoarding 45lb plates for future use, they're demanding them for use now. Expand this for every industry impacted by shutdown orders. It wouldn't take long to think of hundreds of examples of non-hoarding shortages.
Inflation is coming. Shortages are the market telling you that price MUST increase to equalize demand. And it will.
True, but misleading; again, it's real rather than nominal rates that matter to most people. Before the GFC you could get interest on savings above the rate of inflation, even after tax. Not spectacular gains, but saving was at least possible.
After the GFC your choices are to either a) join the long queue of ever-greater fools piling into the casino, or b) watch central banks confiscate your money, year after year, forever.
Like like after the 2008 crisis that didn't lead to inflation, this won't either, as long at they turn off the money printer when people start investing again.
We are going to have deflation. The stock market already "deflated". Just wait for the rest. Food prices are going to go through the roof (and maybe medical procedures) but everything else is going to get cheaper.
Another big chunk is housing, which as far as I know, shouldn't expect much difference in supply or demand in the short term, though demand may increase (at least as measured by square footage) if people are staying home for a long enough time. That may be countered by the reduction in demand for real estate by businesses, though zoning will probably limit the short term effects that has on housing.
Americans don't need to buy their 6th iPhone to save this economy, we just need to focus on what's important. It's very telling of the state of current US politics that when a crisis emerges, everyone says we have to help rich corporations stay rich.
If aliens invaded us today our first reaction would be to lower interest rates.
What does it say that you use Apple as a supporting example, one of the strongest corporations in the history of the world, rather than any or all of the millions of small businesses all over the country which are now hanging on by a thread.
Really serious inflation is when prices in supermarket change twice a day like in Brasil in the old times. It is Weimar style hyperinflation where everyone want to get rid of paper money right away.
Inflation of 2-3% is actually desirable - it is a sign of healthy, growing economy. Additionaly it is good for public finances as most expenditures is fixed and tax recipes are over the target. Yes it is a kind of tax on people but in healthy economy who cares?
Most central banks and banks in general (also insurers) dread deflation not small inflation.
Why 2-3% and not 5-7% or -1-1%? Source for this assertion?
Does the United States risk doing damage to our currency and how other nations use it with the stimulus/money printing that is going on?
I never understood/agreed with this argument. I'd much rather withdraw all my money and keep it in a safe than lock in a loss. I suppose for most people though the minor loss of principal outweighs that inconvenience, but for me, as a matter of principle, I refuse to be paid less than my principal (I didn't mean for that to come out as cheesy as it did).
Since we're discussing a negative rate environment, presumably this is a stressful time for the economy making this more likely than history would indicate. If you have your assets at multiple institutions to stay under the limits, what's the probability of one of those failing, and what's the probability the FDIC fails?
Depending on how negative rates are, the math can quickly turn those probabilities you outlined above into risks I'm willing to take.
He talked about feudal times when landowners had to store their gold. So they had to build these massive castles with walls, hire professional soldiers, train their kids to wield weapons and even give some of their land to particularly good soldiers. That system was really expensive so they needed slaves to keep the whole system going. Since all the other landowners knew that you had all your gold in your castle, when they came upon hard times they would often attack. So, you would give your slaves primitive weapons and have them fight to defend ‘their homes’.
From the serf’s perspective, that system sucked. They worked hard, didn’t get paid and occasionally had to go into battle to protect their landowner. After a few generations, when you say “you know, Grandpa died in a battle. Dad and all my uncles died in battles. Three of my siblings died as infants. And they want me to take a fucking spear and protect that system?
Over the years, the system collapsed because slaves could get a better deal in cities. Landowners couldn’t afford their fortunes and castles fell into disrepair.
Basically, banks seem like a real ripoff until you consider the reality of having to store all your money in an environment where everyone knows whereabouts you have it stored!
You're acting like I would go on hackernews and tell everybody where my money is or something...
The castles and gold vaults were nice but only as a temporary store of wealth. Most of rulers were constantly in debt used to pay for wars and representation (buying influence).
XIX century introduced bonds which paid yields in coin, bankrupted most of landowners and created this new breed of entrepreneur capitalist.
Denmark has a negative interest rate [1] but has had a (positive) inflation for a while [2].
[1] https://en.wikipedia.org/wiki/List_of_countries_by_central_b...
[2] https://data.worldbank.org/indicator/FP.CPI.TOTL.ZG?location...
1) should I stop saving?
No. negative interest rates won't go that negative. Even if your bank is earning -1% interest, it still makes sense to be saving.
2) Should I put my savings elsewhere?
Probably. ETFs or index funds with wide stock market exposure are a good idea (good examples are SPY, VOO, VO, VFINX... and many others). You make money by buying stocks when the market is low and selling when the market is high. Long term, it will probably go up as it always has. That said, it's very hard to time the market, so the best strategy is to put your money in over time. One good way to do this is to take a set amount of money from each paycheck and invest it every pay period, regardless of what the market is at. If you have a bunch of money sitting in savings right now, maybe divide it into 52 parts (or 104 or 156 or even 208 depending on your risk tolerance and/or thoughts on how long this market decline will last) and invest that amount each week.
3) Should I take out loans to buy up assets?
Probably not. No one is gonna give you an unsecured loan at a good enough rate that will make this worthwhile. And a secured loan will be against something like a house, which you probably don't want to risk losing. This is almost never a good idea.
One big exception might be buying a home. When the dust settles, the real estate market might take a big hit in which case taking out a loan (i.e. a mortgage) to buy a home might be a good idea.
4) Should I build businesses and raise venture capital for them?
Depends on the business. Venture capital money is going to tighten up a lot. People just aren't going to be throwing around money during a recession in the way that they did 6 months ago. But if you can stomach it, this is probably as good a time as ever to build a business that can get to profitability quickly. The only caveat is that it might be a risky time to quit a job with a stable income. Typically, it's easy to take for granted that if your business fails you can just get a job. Right now, that seems less certain.
A great way to lock in decent rates and still have the safety of a bank account is with CDs. See https://www.ally.com/bank/cd-rates/ for example, where you can get 1.45-1.55% guaranteed interest on an 18 month CD where you can pull your money out at any time without penalty. A month ago, I put money into this same CD when rates were closer to 1.9%. Now is a good time to lock this in as these rates can go lower (but if they go up, you can simply withdraw your money and reinvest).
> Venture capital money is going to tighten up a lot.
This makes it especially important to think about a path to profitability. A lot of great startups are going to go under because they won't raise the money to keep going for the next 12-18 months, even though long-term they might be great (viable) businesses
It seems counterintuitive but dollar-cost averaging is really just another way of timing the market. The only way to avoid the downfalls of market timing is to invest everything you want to invest, as soon as you can. Dollar-cost averaging typically loses compared to that strategy.
See: http://valueaveraging.ca/research/Analysis_Dollar_Cost_Avera...
For example, maybe there will be a downturn for the next 2 months but what about the 7 months following that? They could all be green for all we know, and all that money would be sitting around being lost to inflation. Also consider this: on average, missing just the best 10 trading days of each year would cut your returns in half, historically. We have already had several huge single-day rallies even in this downturn, and people who divested for that period may have made their losses even worse by doing that.
That's what happens if you invest lump sum -- you get the average, which is usually good because of the upwards trend of the market (due to the market risk premium).
When you DCA, you need to think about all the money that's NOT invested during that time, being lost to inflation. Essentially you are betting against the market with that fraction of your money over the period you do the DCA. But it's not obvious that that's whats happening because when you are in the process of doing DCA, it "feels" like it's all invested to some degree.
If you want something that's lower risk than the stock market, then you can just go with an asset allocation that's less than 100% equities and just stick with it. But there is no reason to change your asset allocation over time if your financial situation is not changing (assuming you can't time the market), yet that is basically what DCA does.
> When you DCA, you need to think about all the money that's NOT invested during that time, being lost to inflation.
I see. So DCA makes sense only if you don't actually have that money available (eg. as a way of investing part of each future paycheck).
Negative rates don’t mean alternatives become better investment strategies. It just moves goal posts to encourage more risk taking in the economy.
Housing looks like the best alternative investment strategy. There are funds that focus on solid rental markets, owning their housing complexes for example.
This is not true, and is massively dependent on many other prevailing economic forces.
This of course is not as straightforward as putting your money in a saving account. But it is also not as complicated as you might expect. You need to decide what risks you are comfortable with. How do you view the world and the markets in 5-10-20 years and do your research.
Once the dust settles, you can invest in all sorts of safe-ish type vehicles that aren't Treasurys and still clip a coupon. High-dividend stocks such as utilities are one example, but a financial advisor can help you pick the right investment for your portfolio.
Does anyone know of any prominent economists who argue that deflation may be a good thing? I know the overwhelming consensus is that you want something like 2% or 3% inflation to ensure market growth but I'm always interested in alternative perspectives, particularly because personally I'm not convinced that you necessarily want (or need) perpetual growth.
If you don't have the time, read chapter 8 and 20, as Warren Buffett has recommended it. It might not teach you how to prosper [under negative interest rate] but I think it will give you something to work on and provide you with a good framework in investing.
I'm not a financial advisor so I cannot give you advice but I think investing in yourself is a sound advice.
General advise, don't stop saving. If you already have a regular habit to save part of your income and you can afford that, continue as far you can. Look for the long term.
Take time to analyze your current status and organize your decisions based in your goals and try to take advantage of the current configuration, but don't do the contrary and don't take decisions only based in current situation.
Since interest rates will be low, it could be a good buying opportunity for investment property. There is always risk here and with a rent strike looming there is potential for even more. I was already in the market for investment property so I've been following various markets (zillow lets you export a ton of data about historic property values and projections). Prices haven't fallen yet, but back in 2008 there were a number of years where it was a buyer's market. The stimulus bill that just passed also drops the limit on real estate depreciation, which is a potentially massive windfall for real estate investors.
Not that it takes advantage of negative interest rates, but stocks are "on sale" right now and with today being the last day of Q1 and the viral apex on the horizon, more bad news is likely on the way... so there might be an even better opportunity to buy some previously top performing stocks in the coming months. I made about 60% between October and February and plan to buy back in soon with much better positions.
I'm very interested to hear what others are thinking about doing or if they have feedback about what I'm thinking.
I talked about buying a condo with my brother and renting it out but at the end of the day I'm just not comfortable just taking someone else's income because I happen to have the money on hand to make a down payment. It seems so predatory.
At the end of the day, somebody is going to rent them a place and I feel like I am one of the better people to do that. From my experience as a tenant, I think I can be a better landlord than someone whose only source of income is other people's rent.
A savings account at 0% doesn't build wealth, but it didn't really do that 3 months ago at 1.5%. Personal loans at 9% aren't much better than loans at 11%.
If you're not planning on making a career out of doing something finance-related, I'd say there isn't much to do differently.
My one recommendation would be to hedge a little against the possibility of asset bubbles. I'm not saying bet on them (I don't know if they'll happen, nor can I predict the future and time them). Rather, I'm saying try not to be in a bad spot if they happen, because easy money definitely increases the chance we could see one. As an example, everyone in this life needs a roof over their head, so if you don't own anything real estate related, a bubble in real estate prices is a risk. A homeowner who plans to stay in their house 20 more years doesn't have to care about annual changes in the real estate market...but a renter does. So own your home if it makes sense for your situation, or consider having money in REITs, or own a rental property. Don't over-extend yourself, but try to avoid needing a tulip and not having one in 1636.
Likewise, if you are relying on investments to retire, and are many years away from doing so, make sure a significant portion is in boring sp500/total stock market etfs. If your time horizon is long enough, not being able to buy stocks at a decent price is a bigger threat to your retirement than a short term drop, so make sure you have some amount of money in the market while the market isn't at all time highs.
As always, it depends on your situation and I'm not qualified to tell you what to do with your finances.
But now I have cash and I'm nervous inflation might start becoming a real problem.
I'm also worried that dense American cities are going to have a huge drop in property values, desirability, and an increase in crime. I am seeing this right now, and a lot of sentiment from people with money is to never come back.
It's a tough call. Is this a good time to buy property if there's a crash in six months?
Will there really be asset inflation of properties if there's a commercial default explosion about to happen (hurting banks), if a lot of people are unemployed, and if cities become a little less popular? Crime is spiking in NYC right now and it's not really a priority to report it.
As an investment, or a place to live?
What are the alternatives for investing? They might be better, they might not be.
If the time frame you're considering is long enough, presumably yes, it's a great time. And if your time frame is even longer, the answer is it doesn't really matter :)
We only started forcing (politely) people to self isolate. That's right, in NYC there are still crowds, and cops aren't able to keep people apart. Polite communitarianism.
How can you know this? If it is not being reported, you must be relying on anecdotal reporting? Reddit, nextdoor, facebook?
Before the pandemic crime had spiked for certain things, like misdemeanor assaults and robberies, I want to say 20+ percent. The politicians use Major Crimes, because it makes them look better as they go down and you can also make them go down by downgrading indictments or pushing people who report crimes so it's filed differently (if you've been the victim of robbery they'll do everything to lower the value of the items, as one example). But you can view CompStat data from before the pandemic. DAs accused the NYPD of exaggerating but DAs had already begun to decline to prosecute. Also the discovery rules just got more strict.
Now logic for the present moment: a large percentage of the NYPD is out sick, a lot of people have no income and there's no one in the street. Would you feel safe? There are regular strongarm and knife-point robberies reported on Citizen near where I live.
I don't want to claim that there isn't a spike in crime. There may well be. But you really have to be careful in relying on what you see reported on these apps. Especially with so many people at home, nervous and stressed out.
Also, Detroit's murder rate has just spiked by 50 pct and shootings by 30%, because you can't 'hide' that or hand wave that away.
Now I have cash and wondering if inflation will become a problem for the first time since the 70s.
Buy a house and when you can buy a bigger house. Put your money in the growth part of the stock market (technology ... big names like Apple and Amazon is good).
Use your income to take on more debt; do not save cash as it will be taken from your via inflation, tax or now negative interest.
For some reason, this sounds like "you don't build wealth by saving. You do it by lottery and scratchcards!"
Leverage is the easiest way to make a larger percentage on your money, as long as it's used prudently.
Borrowing money to buy real estate and then collect income is a very common way to leverage your money. Over time that builds real wealth. My friend has bought 5 properties and is renting them all out. When he retires, the properties will have been paid for, and the rental money will act like his pension until he dies.
This only "builds real wealth" for one person. For the larger system consisting of all 6 people, it's a net loss (the interest payments are still leaving, upwards). We've built a financial system where it is in everybody's self interest to make everybody else worse off.
The positive sum progress from the economy was enough to outrun this setup when there was abundant energy and foreign countries to colonize, hence the focus on "growth". But that era is over, and we're now stuck with a black hole of debt that still needs to be serviced...
However, I'm able to rent and live in a much nicer area than where I could afford to buy.
This is the same in the US, FWIW. Most landlords aren't going to care what you do, as long as you don't damage common areas and return it in mint conditoin.
The justifications/case for home ownership can often be over-hyped. Everything works out well in a rising market. When shit hits the fan, sure my landlord can raise my rent, but I can move to another city for a better job with a very minimal hit. The stock market has created higher long term gains than the real estate market and is a hell of a lot more liquid.
The fact that people say your house is an "asset" is abuse of the definition and IMHO drives people to buy more house than they need. Sure it's an asset, but you also live there. Your liquidity is greatly reduced and your options become very limited.
Rental properties are another story. If you know what you're doing and can afford it, then I don't see issues with using that as an investing strategy. Just maybe don't buy all of them in the same city, or the same type of property. Just like with stocks and side hustles, diversification is important.
I can paint the walls, put up pictures (Berlin has better rules than UK/Australia). Not that I do when I can.
I've only been evicted a couple of times, and even then I wanted to move anyway so it was convenient. It's usually me/us moving on and the landlord annoyed that they have to find a new tenant.
And don't forget the wonderful bonus of anything that goes wrong being someone else's problem. Roof leaking? Phone the landlord. Rising damp? Phone the landlord. Mold problems? Neighbours building a new fence? Frost damage to the pathway? Pipes frozen? Window cracked? All not my problem.
Societal wealth is built by one person building a lot of wealth based on others paying him, and just replicating that millions of times over the population.
No, leaving out the critical piece does not represent my claim. Rather you're just shoehorning into the traditional narrative that each person trying to build the most individual wealth inductively extrapolates to society as a whole becoming richer.
The critical part of my claim is:
> For the larger system consisting of all 6 people, it's a net loss
Not merely a loss for 5 and a gain for 1, but a net loss for all 6 parties summed together. Draw a boundary around them and analyze cross-boundary flow. The interest payments flow away, meaning the group is worse off even though the landlord individually benefits.
Our economy is based around debt rather than positive wealth. For someone to have financial wealth, others must be in debt. The shining ideal where everybody is financially independent is impossible under the current system. And the more the financial bubble grows in relation to actual physical wealth, the truer this becomes.
Leverage works both ways, it will amplify both gains and losses.
These are not alike in any way.
No doubt someone will say "you don't have to buy", but then you have to rent. Forever. Because they keep bailing out housing.
unfamiliarity with the term "leverage", probably
Trump and his administration could have really done something awesome. He essentially got given the golden ticket for presidents: create a legacy. T. Roosevelt had parka, FDR had the new deal. Eisenhower built highways (which he copied from Hitler’s autobahn). JFK said we would put a man on the moon (and ultimately did).
Trump could have said hey, let’s build high speed rail across our country! Let’s reinforce our highways. Let’s dump a bunch of money into building new schools or paying teachers more. When the virus is gone the economy will be humming! The markets would have soared. The U.S. would have had something qualitative to show for the $2T line of debt we just took out on ourselves.
(1) https://www.cheatsheet.com/uncategorized/history-and-warren-...
Yes, his point that cash loses its value over time is true. No, he didn't get to where he is just by holding cash. Yes, your situation and mine are vastly different from Buffett's.
But it just shows that things aren't as simple as "cash=bad".
Trump has a pandemic. Ultimately, you can't really go out and build a high speed railway during a pandemic, when you want to enforce social distancing and isolations (construction is the opposite to social distancing). And the US is so big that high speed rail would still be an awful way to go cross-country (it's only really effective within states), perhaps effective for transporting goods but a guess on the data suggests this isn't economic. Dumping money into schools won't fix education, either.
Trump could've perhaps weaponised coronavirus better, but not by through of these ways. That said, he has chartered a course for the most 'socialist' action in recent American history, though: free money. I'd like to see if and how this impacts the future, perhaps it may affect the timeline of implementing a UBI.
Depending on what you mean by "fix". If colleges payed Silicon Valley salaries, I think the quality of College Education would soar.
Do you have suggestions for these?
Let's say the futures price is higher than the spot price and there is 3 months left until maturity. You sell the same (USD equivalent) amount in the future (expensive) and buy in the spot (cheap). You just made a profit and no matter where the price goes - you're hedged. The only thing is that you're stuck with 2 positions now. Just wait 3 months until maturity and the futures and spot price will converge to the same price. Now buy in the futures and sell in the spot and you've done it!
Of course, while being pretty much risk free the upside is also limited to how much (percentually) the future is above/below the spot.
Buy a house and some stocks in growth sectors.
Futures are how you multiply your money with relatively low risk. Stocks are how you get 5% returns amortized YOY if you're lucky
I don't need to be a finance expert to know when somebody sells a snake oil - things that sound too good to be true most often are.
As for me, I like to hedge out the market and sector movements by being long/short (adjusted for beta) within a given sector. I only make money if my long outperforms my short. Trump tweets and other companies' earnings in the sector do not affect my P/L.
This is a problem. The "risk free returns" are state enabled rentier schemes. They are not only "risk free", they are also "effort free".
If someone is taking a free ride they are a rentier.
If you have a lot of these people, overall living standards tank.
If it becomes the only paradigm that people can imagine making a difference, you are on the road to total collapse.
As Benjamin Graham said “Buy when most people, including experts, are pessimistic, and sell when they are actively optimistic.”
i.e. They are diversified over time.
>Buy a house and when you can buy a bigger house. Put your money in the growth part of the stock market (technology ... big names like Apple and Amazon is good).
Your advice is sound, but I still argue that the system is extremely immoral. Consider what this mindset has done to the environment. The reality of Keynesianism is that by allowing the government to manipulate the market via inflation, we have encouraged a massive over-consumption of resources. People who would have otherwise saved their money and been satisfied with their current rate consumption are essentially threatened into spending their money faster. But hey, the system's worked for 87 years and only created the least equitable distribution of wealth ever seen on Earth, so I'm sure it will work for the next 87.
How are living standards versus the '60s? It's not just immoral, it's bad news.
If your country has too many wealth appropriators and not enough wealth creators you are going to have a bad time.
1) 0% may feel like a threshold, but it's not that quantitatively different from the sub 2% interest rate environment we've been living in for many years from a wealth generation standpoint.
2) Should you stop saving? If you mean should you be generating more cash that you spend, the answer is that's probably a good idea unless you have a pressing cash need now. If by saving you mean putting your money in a Savings Account, then yeah there are probably better uses of your capital since most pay effectively 0% interest.
3) So where should you put it? This depends a lot on your tolerance for risk, and your forecast for how quickly you might need the cash. If you need it soon and/or have a low appetite for risk, then go for safer, less volatile assets like treasuries or CDs. If you have a bit of time and risk tolerance, stocks have pulled back considerably so buying in at depressed prices and waiting for the recovery might be a good idea. Real estate is probably similar depending on where you live. If you really want to swing for the fences, go ahead and start a business, although ultimately there are a million factors that will determine your success before the interest rate environment will.
4) Should you take out debt to buy even more assets than you could with my own cash? Maybe, this all depends on your risk tolerance. If your investment decisions are good, you will reap even more returns. But if they are are bad, you will have to pay back the debt after incurring losses. So it just pushes your outcomes towards the extremes. You probably should not do this solely because interest rates are low.
A final note-- your approach to wealth generation shouldn't change based on interest rates. I think your upbringing is mostly correct, if you work diligently and spend less than you make, you will be on a road to building wealth.
The question is what to invest your free cash flow in, and the answer is almost always: all of these options. Diversifying is the best way to minimize unsystemic investment risk.
The question is then: how do you allocate your capital between risky and safe assets? That depends on the interest rates, your near to medium term cash requirements, your risk tolerance, and your age. That said, a rule of thumb is to do (100 - age)% in riskier investments, and your age% in safer investments.
this book was pre-web, and the scene a very minor scene of one relevance to the larger plot, but I still think about it a lot
Doing better than average comes with risk. If you're even asking this question, you can afford risk. Few would even think to "build [multiple] businesses", much less start with the assumption of access to venture capital.
So if you want risk aversion, you can do the same thing you've always done: put your money in a broad index fund and trust that the markets will recover well before you retire. The fact that they've always done so eventually is not proof that they will this time, but nobody can give you advice for the black swan event of markets failing perfectly. In that case you'll have worse things to worry about than your 401k.
If you want to take a risk from the Fed giving out free money... well, those negative interest rates aren't available to consumers. For example, mortgage rates are actually going up because so many see this as a signal to refinance. That money is mostly going to the bond market, because it's the last line of defense for the government. From there it goes to the stock market, where it's going to sustain an unsustainable boom. (Despite what I said earlier, the market as a whole is almost certainly overpriced, and even the earlier fall didn't fully correct it.)
Basically, the Fed free money isn't for you. It's about the government and a few financial firms, and your 401k's tiny piece of that. All you can do is muddle along the same way you always did. Go ahead and start a business or buy somebody else's, if you've got the free cash -- and it sounds like you do. You'll probably lose it, because most fail. But that's how one does better than average.
Also a good time to shop for a credit card with a better rate.