Churchouse Letter
May 2016                   by Peter Churchouse

The Uncharted Waters of Negative Interest Rates

Negative interest rates an yields are not normal. They defy common sense, logic & everything we think we know about markets & economics.

It makes ZERO sense to buy a negative yielding asset... but US$10 trillion of global bonds now offer this.
There is no precedent for where we are right now... none. But the possible consequences are worrying, if for no other reason that we can't even identify them yet. So please take steps now.

In 1497, Vasco da Gama set sail form Portugal to find a route to India. Like the thousands of men and their ships that had perished before him, he had little idea of where he was going to end up or what he might find along the way.

At a time when many believed the world to be flat, and to sail into the horizon would be to fall off the end of the world, it was a huge risk.

Da Gama’s plan was to navigate around the southern tip of Africa, around the Cape of Good Hope and onwards to India to avoid the disputed Mediterranean and the treacherous Arabian Peninsula.

Knowing some but not all of the dangers he and his ships would face, he still ventured forth in his quest to navigate uncharted waters and, ultimately, uncover untold riches.

More than 500 years later, here we are, India just a flight away for anyone who wishes to visit it. But there is another epic journey of similar risk, and even greater unknowns being attempted by the central banks as they launch into a world of negative interest rates.

This time, not just the lives of the crew or the glory of Portugal are at stake.

The success or failure of this grand experiment, and the discoveries along the way and wherever we end up, have serious consequences for the entire global community.

Reality Bites

Persistent and extensive negative yields and interest rates are no longer the work of economic science fiction, it is a reality. It’s already happening. Now. Today.

And this isn’t “someone else’s problem”.

It is something we ALL need to understand.

The practice of credit and interest predates any kind of banking, or even coinage. Loans with interest began when the Neolithic-era (many thousands of years before the birth of Christ) farmer would lend a seed to a relative and expect a seed back plus extra at harvest time.

Laws regulating credit are documented as far back as the earliest days of Babylonia, Greece and Rome.

According to Sidney Homer and Richard’s Sylla’s A History of Interest Rates, “the recorded legal history of several great civilizations started with elaborate regulation of credit.”

Critically, in every case, such legislation was introduced in response to crises characterized by excessive debt. Yet, in all those thousands of years nowhere does it record a situation of such persistent negative interest rates as we see today.

When I say these are uncharted territories that we are navigating into right now, I mean it!

Look at Figure 1. This is the longest-dated chart of historical interest rates I’ve ever seen. It dates back to 3,000 years before the birth of Christ.

The history of Long and Short-term Interest Rates from 3000 BC to 2016.

Aside from a very brief dip into negative rates in the wake of the great depression, there’s never been a period of large-scale sustained negative interest rates or yields.

I’m an economist by training and there are dozens of schools of economic thought. But it’s very, very hard to find anything comprehensive on the subject of persistent negative interest rates.

Because it’s simply not supposed to happen…


Roughly 40% of the developed world’s government bonds are now offering negative interest rates.

Ratings agency Fitch estimates that there is roughly US$10 trillion of negative-yielding sovereign debt circulating globally right now.

According to the Financial Times, in the US$44 trillion global government bond market, 85% of bonds yield less than 10-year U.S. treasuries (1.75%) and an incredible 99.7% yields less than the 30-year treasury (2.60%).

This is truly staggering. And I promise you that nobody knows how this will end…

When it comes to negative yields it means that anyone buying $100,000 worth of Danish, French, German, Dutch, Swiss, Swedish, Japanese or even Spanish government bonds today (depending on the maturity) will receive no interest income.

In fact, you are paying the government for the privilege of holding your money.

Are you a Swiss citizen looking to buy a nice safe 5-year government bond? Your government will charge you 0.75% per annum for the privilege.

In other words, they promise to take 3.75% of your money over five years.

Hand-on-heart it’s the only time in my life where I’ve seen investors buying something that is guaranteed to lose money in nominal terms.

You have to ask why anyone would buy such instruments, and what the governments and central banks are trying to achieve by punishing savers in such a way.

And… Repeat

It all goes back to the global financial crisis, which had its roots in the US sub-prime lending binge, and the extended financial tentacles that it spawned.

The ensuing financial meltdown resulted in a global economic slowdown that has defied all attempts so far to lift growth anywhere near close to previous levels.

Low, or near zero interest rates were supposed to boost growth, boost spending, boost investment. Well, for the first time ever, this has NOT worked.

Recession still threatens large parts of the world. Deflation (falling prices) still lurks uncomfortably close.

What are the central banks doing about it?

More of the same! More of what has not worked so far. Just do more of it and it will eventually work. So let’s push interest rates down even further, into negative territory. Let’s make savers PAY to keep their money in banks or in supposedly safe government instruments.

Negative interest rates are supposed to do what low/zero interest rates have failed to do. Stimulate growth.

Finally, academics and economists are seriously questioning this assumption. Remember Albert Einstein’s definition of insanity? Yep, doing the same thing over and over again and expecting different results.

The reality of negative interest rates is bringing cries of “economic madness” from academia, banking, finance, and investment. It is also enraging the general population, Japan being a prime example.


While it is tempting to launch into a rant on the apparent idiocy of negative interest rates, I need to resist the temptation and stay calm enough to try and understand where this is all headed.

My subscribers don’t pay me to get worked up. You pay me to use decades and decades of experience and research to help you recognize what we are facing, and how to deal with it.

We need to figure out what our policy makers are doing and what it means for ordinary people like you and me. How it affects our long-term financial health, our pensions, our financial safety nets, and, yes, our investment opportunities.

As I’ve witnessed time and again, crises always produce opportunities for those who have the foresight to identify them and the courage to take advantage of them.

Negative yields... negative interest rate... They're happening NOW. In this edition of The Churchouse Letter we explain exactly what you should be adding to you portfolio to best protect yourself. Subscribe now and see for yourself. And you always have the comfort of our 50-day risk free money-back guarantee.

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