The Valor Blog.
Investment News and Views, Direct from Our Team.

Roger Bannister and negative rates

The world has survived another great depression over the last 8 years due to ever decreasing interest rates. The question is how low can they go?


We believe that there is a hard floor on negative rates. There is a point that rates cant go any further negative because savers just refuse to hand over cash at some negative rate. This might be -1.5% or -2%. We don’t know and until savers start to flee on mass the number is unknown.


The Roger Bannister effect then grips savers. Before Roger Bannister broke the 4 minute mile in 1954, it was widely believed that it was impossible to run the distance in that time. After his run, numerous runners achieved this feat. It was Roger’s achievement that allowed people to follow his lead. We believe that once it is seen to be achievable of removing cash from banks, then a snowball effect will follow.


What we expect to happen is an innovative business will come and offer to store cash at a better rate than the bank. At this point in time there will be a bank run and exodus of long-term government bonds. This is the point of no return for the world.


Sweeden is ground zero for negative rates. They have the lowest rate of negative 1%. There will come a time where the rates cant go further negative and the day that happens is the day the world realizes the true lowest possible rate. Central banks can do what they please, however the faith will be lost in their abilities.


The problem is the worlds central banks have promised that lower rates will stay lower for longer and that this scenario will allow the world to recover. This is a promise they can’t keep.


Pension funds and insurance companies have been fine in a world of ever decreasing bond yields. Their bond portfolios have been making sufficient capital gains to meet their hurdle requirements, which are around the 6-7% mark. There are some that are higher, which is fantasyland and there are a few rational ones that have dropped their hurdle rates to closer to 3.5%. Unfortunately in a world of negative and zero rates, they are all unsustainable over the medium to long term.


The day that yields truly stop falling or going further negative is the day the world becomes unfunded. Pension liabilities around the world become a burden that almost no company can afford.


The question is:


When do yields find their floor? That is the day you want to avoid all investments dependent on 7% hurdle rates. The vast majority of the worlds pension funds and insurance companies have liabilities have no way of ever being repaid.


This is the day the negative interest rates experiment gets put back in the category of experiments that failed horribly. Possibly the largest failure in history.