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. You have to look at real rates, not nominal rates. The only markets that have negative nominal rates are battling deflation (which the US is not) or have serious liquidity concerns at the moment. The Fed is unlikely to go negative as they face a very different beast. 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. but we're not having deflation. With fewer and fewer people working, there's less and less supply with even larger demand, now that they're printing money like never before. As a result, we're going to get really really serious inflation of over 2%, 3%, maybe even more than 3%. 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? 1) Once again, inflation does not work that way. If it did, it would have been out of control in 2009. Instead, it was near zero. The same thing is happening right now. 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. Anyone else have a hard time believing the official inflation numbers? Housing, food, restaurants, electricity, hotels,... anything I can think of that I buy regularly all seems significantly more expensive than it did 10 years ago - much higher than the official numbers would lead me to expect. This is my experience as well ... and healthcare and education costs have also gone up much faster than the stated rate of inflation. There are a few areas --- like consumer electronics and maybe food --- where this isn't the case or prices have actually gone down, but only a very few. For context, the inflation goal set by the Swedish national bank is 2%. That's what they're aiming for, so clearly it's not "really really serious". CNBC also states that: >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. 1-3% is also the Bank of Canada's target range: https://www.bankofcanada.ca/rates/indicators/key-variables/k... I agree that 2-3% inflation is nothing to worry about. But what's happening now is not quite the same thing as in 2009. 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. Do we really have a shortage of supply? For what products? The only shortages I have seen are for toilet paper and a few random grocery store products that maniacs decide to stockpile next. (in my community, there is all the sudden a run on ice cream now that bread is back in stock). We have a shortage of farm labour for instance, which may soon turn into a shortage of fresh produce and into massive food price inflation. We have a shortage of home delivery capacity. 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. Where did the restaurants and the school get their food from? I know that means a great disruption, but I’m still not convinced that means a shortage. Sysco and the like. It's probably a distribution rather than a supply issue. Exactly. Typical container size in foodservice distribution is a #10 can, packed 6 to a case. Each #10 can is 3 quarts. Fairly few households are interested in buying canned tomatoes 18 quarts at a time. Hoarding is a small aspect of current shortages. I'll pick one example at random: 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. VR systems and Nintendo Switch systems are also out of supply, they were bought up quickly when the quarantine started and China hasn’t been making any new ones for a couple of months now. A personal example. Gym equipment: barbells, weight plates, squat racks, etc are either sold out or way overpriced right now because gyms are closed. I bought a barbell set the week before my gym closed, and now that I went to look to buy new weights for it Im looking at "out of stock until May" > 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 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. i was well aware of the 70s and 80s, that doesn't make it right. There's less supply of what? We still have plenty of food, plenty of homes, plenty of water. Yeah, we have less Airbnbs getting booked, and Ubers being called, but does that really fucking matter? It only matters to the VCs who have invested in these companies. 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. There was this joke running on Twitter: If aliens invaded us today our first reaction would be to lower interest rates. > but we're not having deflation. 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. Stocks are deflated because they aren’t expected to earn because people aren’t out buying and companies aren’t earning. Same for oil. Same for airline tickets. It seems obvious that there is deflation. If you have a good paying job right now, you can buy a lot for less. Given that food and medicine make up a large portion of spending, I think we'll see something more like, "some prices go up and others go down." 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. > get really really serious inflation of over 2%, 3%, maybe even more than 3% 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. > Inflation of 2-3% is actually desirable - it is a sign of healthy, growing economy. Why 2-3% and not 5-7% or -1-1%? Source for this assertion? Inflation target for most CB.. At the moment, foreign demand for the dollar is so high that we are experiencing deflation (liquidity is still too low which is entirely why the fed is moving towards negative interest rates), in spite of the money printer going "brrrrr" This is actually more true than people realize. Gold is down to flat even after the the huge Fed announcements. The CRB index has been getting crushed in the last month. But this short-term liquidity demand is going to go away. The real inflation story is going to be when it does and the economy settles down. Then we will have all these programs that pumped huge amounts of money into the system, and unless they are sanitized watch out. I've seen people losing a lot of money on gold calls, but i think the proper time for that is going to be when this short-term credit demand has dried up and business starts returning to normal. The crucial question is when does business return to normal? Credible experts have put the time to a vaccine at 18-24 months. Until then, what sort of "normal" is plausible for say, an airline, or a dentist? > the money printer going "brrrrr" For those who have yet to have the enjoyment of the experience: https://brrr.money/ Can someone explain the 'going brrrrr' meme to me? I've seen it used in other contexts but can't quite fully grasp what is meant by it. It's a tongue in cheek reference to the Federal Reserve "running the printing presses", generating as much fiat as necessary to support the US and global economy. With the US dollar not on the gold standard [1], or tied to something physical resource, the Federal Reserve can create money out of thin air without constraint. Ergo, the "money printer goes brrr". 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) The sound of a lot of paper money being processed: This seems true, every currency pair against the US dollar that I checked is down substantially. Yen, Cad, Eur, Gbp, among others. You may be right, but as Lord Keynes said, the market can stay irrational longer than you can stay solvent. That printing money necessarily leads to inflation is not true in a situation like this. Inflation happens when there's more and more money being used to chase a finite amount of goods. In our current economic situation, there's a huge pile of money that's not chasing any goods at all. 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. They aren't really printing money. They are buying up debt, both private and government that will eventually be sold back to the market or will mature this returning that money back, with appreciation, to the fed. Which will then make it disappear just as easily as they created it. Sure. The Fed doesn't even own printing presses, the Department of Treasury does. However, in this context, "printing money" doesn't mean making physical pieces of paper. It means creating money out of thin air. It does that by buying debt, which, as you note, can be destroyed just as fast as it is created. Upvoted for a wonderful and illustrative explanation. I'm commenting to see if others can corroborate, since I'm ignorant about this topic. Thank you for commenting. Too many arm chair economist talking out their bums in these threads. I'm always reluctant to even look at these discussions now a days due to the poor quality of the comments, but your comment gives me hope. > 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 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. I don't think deflation is the natural state of things. Even before fiat currency the money supply grew (e.g. gold mines) and we had inflation. Productivity growth is normal-ish, but the amount you prices have been all over the place throughout history. Gold mines were not the major cause of inflation during the pre-fiat era. It was almost always deducting the precious metal content of the accepted currency, often to fund things like war. 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. >Deflation should be the natural order of things Yes, and it is, for existing unchanging things. But as productivity grows we invent and buy new and improved things. I think you’re missing the meat of the argument: relatively speaking these things get cheaper over time. Bread has never been cheaper for most people. The average person can buy 2000 kcal for a few percent of their daily wages. However, in absolute terms, a few bucks today is many multiples of what it would have cost a century ago. The difference is that the increase in wages outpaced the increase in the cost of bread. And that is precisely what drives inflation. And that’s why talking in inflation adjusted terms (“real” terms) is so important. So even though bread costs 10x more than it did a century ago because people are earning 20x more so it’s actually cheaper. Compute works the same. Technological progress makes things cheaper in real terms and this is how quality of life improves. You can have inflation as a market result though. 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. I think your natural argument rests on the idea that money is somehow a time-independent measure of "effort" but I don't know if that really makes sense. I agree that is part of my argument. People certainly treat money as if it should be a time-independent measure of effort. Is there another objective metric that you can imagine money representing? 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. I don't think have the luxury of imagining a metric that we wish money to represent any more than we can say that "the number of rats in New York" means anything in any abstract sense. The value of money is an emergent property of what people do with it and if its numeric measure fails to track our selected "objective metric", it's the fault of our metric, not money itself. Objective measures are necessary to independently judge the actions of the people in charge of the money supply. To write off objective standards is to hand them an enormous amount of unchecked power, power which will invariably be abused for their gain. That is both how it is viewed by the 90% and how it is treated by the entire system. This is the source of "Time is money". > It's worth pointing out that this is not "weird", but rather the natural state of things! Except in health care, education, and real-estate - all three of which are needs more fundamental than personal computing or electronics. This is a correct and fair observation. How we measure inflation is complex and widely speculated to be gamed by governments worldwide. Good explanation. Also wrong. 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... This doesn't mean that the OP was wrong, but that the negative interest rate policy successfully prevented deflation. Denmark does not use euro and their NIRP had more to do with keeping parity of krona to euro then fighting deflation. You say this like trade imbalances (driven by FX) have no bearing on inflation...it’s the same side of the coin. I said battling deflation. I didn’t say undergoing. The reason you have negative rates are specifically to avoid deflation. It’s like you didn’t even read what I wrote. But thanks for the smug, and wrong, response. "So, since you don't want to store that money under your mattress"... 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). When I was 19, I had an economics professor who did a great job of explaining that idiom to our young ears. 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! That analogy works when everybody is doing the same thing and it's common knowledge that the average person has their assets sitting in their castle, but we're talking about 2020 when that would be the exception, not the norm. You're acting like I would go on hackernews and tell everybody where my money is or something... I assume if you were going to tell hackernews it would be with a Show HN post for your new pirate app that allows users to find where you have hidden the treasure in your house. I believe the HN-friendly term for that is "geo-caching." That's more a fairytale, then the explanation to human history at least. It sounds almost as if feudalism gone, because guys with swords had no banks to keep their heavy yellowish coins. Which is not very accurate. FWIW very few feudal families were able to hoard gold, or jewels, and for the most part they kept the same things in their castles a village granddaddy would, just in bigger quantities (i.e. food, and fuel). Coins were as expendable as a sauerkraut, and sausages, just easier to store (but not always as liquid as fantasy series makes us think). Were you a feudal you would care the most for the sole thing able to give you wealth almost every year - land. Actually until industrial revolution the only asset generating yield was not gold but landowning. It wasn't risk less but on average it was the only asset available generating positive returns. 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. In order to make the calculation 'correctly', don't forget to price in the correct amount of risk. As an example, say there is a 0.2% chance in any given year of your house catching fire, either through your own fault or from a neighboring property on fire. If there is a 50% chance of you being able to rescue the money in such a situation, then that is an estimated 0.1% loss in any given year. There is also a similarly priceable risk for theft etc, which would probably increase with the amount stored. If it becomes known that there is 500k in cash stored in your house, there are probably plenty of people greedy or desperate enough to break in with heavy tooling when you're out and steal the whole safe. Well, while we're in the realm of discussing tail risks - what is the risk that if your assets exceed FDIC insurance limits, the bank you have them in defaults? 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. So you would rather buy a safe and take out insurance than pay a fee to someone who already has both (i.e a bank)? This is exactly what German banks are doing rather than parking their euros with the central bankhttps://www.bloomberg.com/news/articles/2020-01-31/german-ba... That safe and ancillary services like armed guards or insurance could quite likely cost more than 0.5% per annum. > The Fed is unlikely to go negative as they face a very different beast. 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? Like the old joke about only having to outrun the other guy but not the bear, the US is only at risk if it ends up less stable than somewhere else and doesn't manage to trip them up on the way down. It's still hard to see any more realistic alternative; the EU is struggling with the same crisis, and the Chinese government doesn't even want its currency externalised. Unfortunately not. The US is the tallest midget for the time being, and that’s unlikely to change in the coming decades. When was the last time that the United States had a deflationary period during good market conditions? This might be a pretty new condition for some people. What do you mean by "good market conditions?" Also, we're definitely not in deflationary conditions - this implies a decrease in prices of goods. The shock to supply chains is actually going to make things more expensive. What we're really looking at is the possibility of stagflation - inflation + fall in demand. Check currency trading platforms - we are deflationary as of this moment. ??? That's not how you measure deflation.... edit: for those wondering you wanna look at a Consumer Price Index (CPI) to dertemine inflation/deflation I'd just put it in a safe, and work from home with guns by my side. Saves the extra 0.5%. Rest of my money is in equities anyways, so I really only need the "emergency savings" in cash. (Obviously big businesses can't do this.) With $100k emergency savings, 0.5% is $500 a year. Wouldn’t be worth it for me to stay home and alert 24/7. you’re gonna shoot the fire out? shoot away the flood? or tornado? what about the 30-50 feral hogs that run into my yard within 3-5 mins while my small kids play? So the time value of money is more or less zero now and loan rates depend much more on default risk than any opportunity cost in loaning the money. To an economist, the implications of that might be big, but to a regular person, it's really a small shift in possibilities. 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. I just sold a home days before the pandemic hit, and consider myself very lucky. 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. > Crime is spiking in NYC right now and it's not really a priority to report it. How can you know this? If it is not being reported, you must be relying on anecdotal reporting? Reddit, nextdoor, facebook? Anecdotal - Citizen App blowing up, in several neighborhoods I know well. A large number of street robberies, gunshots heard. Unusual events, like a deadly assault during the afternoon in an area that never happened. 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. Or maybe there are more people at home with free time to make reports on neighborhood apps. "free time"? And are you suggesting these are fake? There are many claims that these community apps end up with multiple reports of the same crime and reports of crimes that didn't actually happen. Not only that, but a lot of urban people have a terrible time distinguishing the sound of gunshots from other noises that are common in urban areas. 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. It's also common sense! People without work, cops calling out sick, and street gangs ready to go. So I trust those reports, and I did just say above there are videos and exact addresses. 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. "Is this a good time to buy property if there's a crash in six months?" 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 :) If you mean you sold your home and invested in stock market just before this all happened, you probably lost 20-25% as of right now as opposed to just holding on to the property. A bear market doesn't mean anything about real estate prices, and in practice demand for real estate increases as the stock market and bond market drops I got lucky, because I had cash from the sale and the world crumbled before I had time to invest in the market. Otherwise I absolutely would have, and I've have absolutely lost a lot. Now I have cash and wondering if inflation will become a problem for the first time since the 70s. As a regular critic of many things and ideas American, I have to point out that in the long run, you’ve never been better off betting against America. I feel gross looking at my 401k. Everything in there is a bet on the continuation of the world that led here, and that world is unjust in the extreme and needs to go. And right now I think we're on the razor's edge fo something wonderful happening. I know a few people participating in rent strikes here in NYC. Maybe this is the week where a decade happens. How do we know this isn't a great flippening event? It will take the West years to recover - we haven't even started. East Asia is up and running. 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. I would love to see you take this and short the SP500, really put your money where your mouth is. Value is relative, and relative to the rest of the world the US is going to fare quite well. So good luck to you! I think you are misunderstanding what he said. He's saying you have never gotten better off by betting against the United States in the long run, not that now is the time to bet against the United States. I read the sentence two time to get what he was saying. Figured it out based on his first part of the sentence. Could have said the same about Rome at some point. In all markets, and generally as a life strategy, there is a "winner" method and a "survivor" method. If you play to win, you are most likely following accepted best practices to maximize gains - in your career, socially, economically, and so on. You optimize to "cut the fat" regularly, stay with the trends and try to be the front-runner in everything. In this market, playing only as a winner amounts to taking on huge amounts of risk, because there's high volatility and little accepted wisdom or trends to follow. Any move that uses leverage could be the one that makes you wash out - and in the same way, being gregariously social to keep up appearances during a pandemic may kill you. The "survivor" method is what it sounds like: playing to not lose. They are not just aiming for low numeric risk factors, though; the point is to have second, third etc. lines of defenses against black swans. Survivors will tend to look for overlooked niches and early diversification. They amass unlikely hoards while keeping their heads down, which leaves them isolated a lot of the time. In general the optimal position for every market is where winner strategies intersect with survivor strategies: Find something that is relatively stable that nobody is talking about and move your money closer to it. Then when the business cycle picks up your portfolio magically turns into something positioned to capitalize. Of course, the essential problem is that if nobody is talking about it, how are you going to discover it? If you wait until it hits the news, that's probably too late. But business formation or repurposing presents another option. Down cycles are opportunities to start the next trend yourself, because the air is clear and you don't have heavy competition. When a market is competitive, everyone spends on sales and marketing to be the loudest voice. When it's quiet, "build it and they will come" becomes a great deal more plausible and you can really focus on product. You don't build wealth by saving. You do it by investing using leverage. The system subsidises debt and risk-taking (within limits) by inflation and the structure of the tax system. You need to let go of the idea that it is immoral. 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. >You need to let go of the idea that it is immoral. >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. Blaming consumerism on Keynesianism rather than, say, advertising and the profit motive is a hell of a bizarre take. Serfdom and slavery would like to have a word with you about inequality. Please explain to me how wage-workers are different from serfs. > You don't build wealth by saving. You do it by investing using leverage. For some reason, this sounds like "you don't build wealth by saving. You do it by lottery and scratchcards!" You're equating buying a house to buying a lottery ticket. These are opposite ends of the risk scale. These are not alike in any way. Ten years ago a lot of people learned that housing is not as safe as they thought. It actually is. You just can't be over-leveraged. The bank will give you waaayy more money than should ever responsibly be taken. Combined with emergency savings, you are quite safe as a homeowner. And how do you bid in a market where every house has >1 bidder and banks are lending waaayy more than is responsible? This! The housing market seems to have punished anyone with a conservative financial mindset. It forces you to fight with the least conservative, and the banks pour on more and more credit to appropriate ever greater swathes of national surplus. No doubt someone will say "you don't have to buy", but then you have to rent. Forever. Because they keep bailing out housing. Yes if you stay within your limits. But if you start loading up on debt because of low interest then things can go bad very quickly. So the advice go stop saving is bad. No. They learned that buying a house with ridiculous terms and unlimited downside is not as safe as they were deluded to believe. Even in 2008, most people paid their mortgages, and were fine, housing wise. I agree that lotteries are close to one side of the risk scale but real estate is closer to the middle than to the other extreme. The other extreme is U.S. treasuries. The last recession was a great illustration of the risk inherent in real estate. And the US treasuries won't even keep up with inflation. If you invested yesterday you'd need to lock in for at least 20 years before you got even 1% return. Warren Buffett talks about how cash is a bad thing to have over time as it can’t keep up inflation (1). He does advocating having enough on hand to “sleep at night”. But you really can’t build wealth by stocking money away in a savings account. 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-... In the meantime Buffett currently holds more cash than just about anyone else on the planet - over $120 billion in cash equivalents at the end of last year. 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". Cash equivalents include commercial paper and bonds. Cash equivalents are not the same as cash. There’s a reason they’re called cash “equivalents”. Um right, but commercial paper and bonds have interest rates, unlike normal cash. So while they're easily converted to cash, they do not suffer as badly from inflation. They also carry risk of default. Those presidents had remote wars and recessions as their triggers. 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. > Dumping money into schools won't fix education, either. Depending on what you mean by "fix". If colleges payed Silicon Valley salaries, I think the quality of College Education would soar. That's not what is generally meant by dumping money into education (normally it refers to primary/secondary education), but I think it holds true here too. After all, we're putting FAR more money into colleges than we did 20 years ago, but very little of that money is going to the professors and it's VERY debatable if there's been any improvement to outcomes due too that funding increase. > For some reason unfamiliarity with the term "leverage", probably Agreed, the GP phrased this poorly. You build wealth by saving and investing the savings in a way that has an appropriate balance of risk and returns for your life circumstances. That may or may not involve leverage. This is absolutely bonkers. Leverage is not the lottery. IS buying a house a lottery? Then why is other property different? Buying it during a housing market bubble is - you can't effectively tell if the bubble will pop or keep growing. I agree with this, it's basically just a more sophisticated version of gambling. That is not true. There are nearly risk-free methods of making investment returns, and when the upside is small but risk is minimal, leverage is the way to amplify the upside. Playing lottery means high risk of losing money and that is not an investment, though the line may seem blurry. (Some turn lottery into a reasonable investment, so it is truly blurry.) > There are nearly risk-free methods of making investment returns 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. > There are nearly risk-free methods of making investment returns Do you have suggestions for these? Spot-Futures arbitrage, especially if your brokers allows you to collateralize your futures position with the profits from your spot position which would allow for higher leverage on the futures side. 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. And please tell me... how often is the cash and carry spread there enough to cover the typical margin fees charged to retail investors? No. Buy a house and some stocks in growth sectors. Being long-only is great when everything is going up. 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. No - You're wrong and the person you're replying to is right. Futures are how you multiply your money with relatively low risk. Stocks are how you get 5% returns amortized YOY if you're lucky Why is there all this free money sitting in the futures market? Yeah I wonder why on earth is any professional trader doing anything else rather than methods described. Those amateurs, right? Money sitting there for free... give me a break. 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. Cost of carry. So then would it help to scale it or not? That's because you don't understand finance. 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. Which is great in a rising market, but will ruin him when the market falls (which it looks like it's about to do). Leverage works both ways, it will amplify both gains and losses. Leverage does not work the same way for real estate. There is no margin call like there is with stock. Even if you are upside down on the mortgage in many cases you are still cashflow positive and can ride it out. And if you are not, even in recourse states in practice the losses are not amplified and a strategic default, deed in lieu, or short sale are still possible. Utterly not true outside the US. I've seen lots of people in negative equity, unable to afford the mortgage and unable to sell (the mortgage liability doesn't go away if you sell the property. If the mortgage is bigger than the current house price, selling doesn't help). People with multiple properties and multiple mortgages are in worse trouble. It's very easy to go bankrupt in this situation, I've seen it happen. The market falling as a whole does not mean that every single individual investment one could have a position in during that time loses value. That's fine unless he was in Detroit. > 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 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... I used to own a house. Now I rent. The ability to walk away from the obligations that house-owning involve is worth a lot of money to me. I probably lose financially, maybe, but meanwhile I get to have a much better standard of living. I'm in the same boat (or, house...boats are not great investments) 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. Ditto. And in this crisis, they're suspending evictions and presumably suspending mortgage payments too. I feel very lucky to have gotten out of that chain. Now I'm renting and fairly comfortable compared to the much larger structure I used to own which included land (now I'm in a one bedroom condo). I just wish I could drill a pull-up bar and TV articulating arm into the wall. However, I'm able to rent and live in a much nicer area than where I could afford to buy. I recently moved to Berlin, and the whole rental market here is awesome. Rent controls mean the rents aren't huge (but they are rising because of the high demand). But the amazing thing (to someone from UK/Australia anyway) is that I can repaint, make alterations, drill holes in the walls, etc. I might have to put it back the way it was at the end, but the landlord can't stop me from doing what I like to the place while I'm here. A whole different attitude to renting. > I might have to put it back the way it was at the end, but the landlord can't stop me from doing what I like to the place while I'm here. A whole different attitude to renting. 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. Nah, it depends on the building rules. There's no such law. In my building you need to give a deposit just to install curtain rods, for example, or hang a TV. I'm rather surprised; the inabiilty to paint the walls or put up pictures or have pets? The knowledge that you might have to leave at short notice? I don't have pets - I'm not able to commit to 10+ years of being able to look after them, so I don't have them. This isn't due to renting, but due to me being bored with places easily. 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. That's why we have a stock market, a futures market, businesses, etc. The commenter above gave an example of a real estate investor. That is a particular type of investor which has to deal with some particular kinds of risk that not everyone is suited to or wants to deal with. For those people, there are other investments they would be good at, and they should engage in. You didn't actually respond to my points, but just pointed out the existence of other types of business where the centralizing flow is less obvious than real estate. If everyone participates in acquiring assets, then everyone builds wealth. Your claim is that real estate builds wealth for one person (or in aggregate, particular people). This is certainly true. If there are 300 million Americans, then, if everyone were a landlord holding 4 other properties (other than their house), only 60 million Americans could benefit from real estate. However, the other 240 million could benefit from owning a business, or owning a stake in one, or owning any of the myriad of assets available to invest in. 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. > Your claim is that real estate builds wealth for one person (or in aggregate, particular people). 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. If it was so certain to work, why we would anyone lend me money to do it when they could just buy the property themselves? This is gambling. If house prices or stock markets go down you suddenly sit on a big pile of debt. The debt is low interest rate but it’s still debt. Not really binary bets or\day trading are gambling, if you can afford it and have spare cash it would make sense over the long term to invest - though not in individual shares for most. As Benjamin Graham said “Buy when most people, including experts, are pessimistic, and sell when they are actively optimistic.” My parents retired a year ago. If they'd kept all their money in the stock market until this month they'd be in a lot of trouble, and probably will be for the foreseeable future - how is that not a gamble? "You need to diversify" would be an argument against gambling in the stock market, and getting into something safer. If they stick to a reasonable withdrawal rate, they likely would not be. The stock market will rise in time, and has almost certainly risen in value since the time they made investments, even with the current drop in share prices. Even if your parents put everything in the stock market, they would presumably draw down that capital gradually over the coming 20+ years. i.e. They are diversified over time. In addition to the withdrawal rate as others have mentioned, the prudent approach to retiring now would be gradually changing their allocation to a less risky mix over the course of several years. Had for example they rotated some equity into a modest amount of Treasuries, that portion of their portfolio would actually be doing well right now (see for example $TLT). Yeah it’s common advise to move a higher proportion of your wealth into cash as you approach retirement and I think it is the default behaviour of superannuation plans (I.e. pension) in Australia. You need to rebalance your portfolio as you get closer to retirement as you can’t time the market. I think by the time you’re retirement age, your portfolio should be 30% equities Would you say that you should put it into safer things, maybe gamble with it less? I think the question is what do you do with the wealth after you build it. Having your entire wealth constantly invested is making it a cog that works to make other ppl richer. > You need to let go of the idea that it is immoral. 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. Sounds like a recipe for disaster for many >> I was brought up to work diligently, not take on debt, and save It absolutely will put you at a huge disadvantage, through no fault of your own. The whole point is to transfer money from savers to debtors. And, there's no getting away from it, unless you take on large risks. The govt is pushing for more and more inflation. We've already had high inflation for the last couple of years of over 2%, and they're still pushing for more inflation. The only way to protect your money is to get into real assets like real estate and equities. Yes, that entails a lot of risk. 2% is not high inflation. That makes a case for non-centrally-manipulated assets like gold or crypto Because neither of those have a history of volatility or risk. > I was brought up to work diligently, not take on debt, and save - a simple approach to building wealth This basically doesn't build wealth, it builds a pile of money which you can draw down in the future. Not nothing and good to have at the base of a pension, but once you've gone beyond the basics it doesn't do much. It's mere deferred consumption, it's not making anything. Now you have to face three problems: - there are people out there with many orders of magnitude more money than you. They don't know what to do with it either. This is why rates are so low. - the risk/reward tradeoff is real. Real estate and equities are popular but both can fall off a cliff suddenly. To successfully invest in either you need to be able to wait out the bad years without cashflow problems. - we're in a period of massive uncertainty. It's a pretty bad time to start a business .. unless you have a clever plan for the pandemic. If you can buy distressed property or businesses at the "end" of the pandemic, and the pandemic ends and the economy returns to the old normal, you could do very well. If. This is a really good time to start a business. Established competition will be struggling because their spending is based on "normal" business but their revenues got hit. When the lockdown stops there's going to be a spending surge (because everyone has been forced to save for months). Yeah , plus what else is there to do? This is a once in lifetime opportunity to risk your time > When the lockdown stops there's going to be a spending surge (because everyone has been forced to save for months). Everyone that had income during that time saved money (ie. remote programmers). The rest just went into debt, right? Or spent whatever money the government provided. “ If you can buy distressed property or businesses at the "end" of the pandemic”.
Even if that goes as planned timing it is going to be tricky as there are a lot of punters in the same business- VC firms buying distressed businesses for a living > there are people out there with many orders of magnitude more money than you. They don't know what to do with it either. Because more fiat tokens have been created than actual wealth has been created. Something has to give on that. Disclaimer: There are plenty of people who know more than I do about economics... There are also plenty of people who know significantly less. My understanding is that situations like this are solved by printing money. (Yup, good ol' inflation.) We (the US) will probably have to; the value of the dollar is skyrocketing compared to other currencies, which makes it hard for us (the US) to conduct business internationally. What does this mean? Now is a great time to take on debt, or to shift debts to pay off debts more slowly. (For example, pay off your car loan with a home equity line of credit.) Why? In periods of high inflation, the real value of your loan's monthly payment goes down very quickly. Why do I think we're going to have high inflation? A lesson from the depression is that forcing people to pay their debts during deflation kills an economy: Wages go down, so a higher percentage of a paycheck goes to debts, which then cuts demand for services, which further lowers wages. My opinion:
Creating value is still worthwhile - no matter what is going on with the currency, it's still used for exchange. So if you're creating value you'll be fine. A friendly reminder: value is determined by the customer. 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. Yup that is the key. Don't spend too much mental energy on the markets unless you think you found your niche. Invest and do some swing trading and spend most of your mental energy on learning how to create value. 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. I'm not a financial planner or financial services professional of any kind, so take anything I say with a grain of salt. 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. > 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. 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... Is timing the market always wrong though? I don't feel like I made a bad deal selling one month ago and now re-entering DCA. It was obvious that the US market was not correctly pricing this pandemic. I think there is a middle ground between day trading and never touching anything. It's always wrong if you take luck out of the equation. With DCA, the problem is all the cash you have sitting around NOT invested while in the process of executing the strategy is really just money that you are betting against the market with. 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. Basically you got lucky this time. Generally it's not good advice. It is counterintuitive since the default explanation about DCA is that one will ride highs and lows for a good average return. I'll have to read that paper. > that one will ride highs and lows for a good average return. 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. I find amazing that Vanguard also suggests this: https://investor.vanguard.com/investing/online-trading/inves... > 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). > No. negative interest rates won't go that negative. Even if your bank is earning -1% interest, it still makes sense to be saving. 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 The Ally no penalty CD offerings are 11 months only. Side note: Last year, at one point, they were 2.3% My bad... I meant 11 months. Thanks for pointing that out. In any case, the overall point stands. At a minimum, most people would benefit from this kind of CD over the money sitting in a savings account. It gives you a low, but decent return while you wait to invest in the market (or other things). A negative interest rate is a penalty for not putting liquid capital to productive investment, regardless of wether such opportunities are at hand. To some extent, so is inflation. 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. > A negative interest rate is a penalty for not putting liquid capital to productive investment This is not true, and is massively dependent on many other prevailing economic forces. CTRL+F and nobody mentioned Austrian Economics, the Mises Institute, gold, bitcoin, sound/hard money... wow. People are really delusional and still completely under the thumb of Keynes' wrong economic "policies". Wake up people. Coronavirus or not, the world has been in a state of decay since after WWI and it snowballed in the 70's when the last of the gold standard was severed. People advising that 2/3 % inflation is "not only not bad, but a sign that the economy is doing great" have absolutely no idea what they are talking about. For those who are a minimum curious, I really advise you to read two fenomenal books - What has government done to our money? - Rothbard, Murray N. - Democracy: The God that failed - Hans-Hermann Hoppe To the OP: government's great plan is to eliminate cash or render cash useless. Everything will more to digital cash where they can effectively do negative interest rates. What can you do to protect yourself? Put most of your money in Bitcoin and Gold. These are the only hard money in existence. Prospering and risk-aversion don't go well together. At best, diligent work will get you ordinary prosperity of a system which generally rises over time. Diligent work is not as rare as people often imagine, and diligent workers fare averagely well. Unfortunately, the variance from that average seems increasingly precarious, as a few do exceptionally well and many slip below it. 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. It's blowing my mind that I just did a ctrl-F for "compound interest" in this thread and got zero hits. It's not even part of the discussion any more. Why? Perhaps we're just assuming we all know how it works. Or, at 2% to -0.5%, it really doesn't make a big difference. If you have 200k and add 20k for 30 years plus compounded interest at 2% you’ll have
1,189,861.13 at the end. And (to return to the original post), how much do you have at compounding of 0% or -0.5%? Lot of concepts here. 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. Maybe donate to charity to help people who have lost a lot more than their investment returns... > Should I put my savings elsewhere? Sure. Consider donating to a food bank, or an effort to provide medical equipment, or some other charity you care about. Is that what you’re doing? If you live in the US you could buy Series I Savings Bonds from the government. They have a fixed rate which is set when you buy them (currently very low) but they also return an additional rate that varies over time based on inflation. (There are also mutual funds out there like e.g. the Vanguard Inflation Protected Securities fund that are supposed to guard against inflation too.) In the long term, I would assume these will not give you anywhere near as good returns as other higher-risk investment options, but they might work for you depending on what you're looking for. for a science fiction take: the economy is in negative inflation in Frederik Pohl’s _The Other End of Time_. There is a scene where some astronauts are on their way home from a day of preparation, and as part of their routine convert their paychecks into cash and browse various sidewalk tables full of collectibles and antiques on the way home, converting their cash into miscellaneous items that would cling to or appreciate in value. 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 Wait, if there's negative inflation, wouldn't you want to hang onto your cash? Sounds more like hyperinflation. ugh. I think you're right. Sorry, it's been about fifteen years since I read it. There's a whole spectrum of risk from buying U.S. Treasurys to trading on margin. You don't have to go to either extreme. And you can buy multiple things and come up with a portfolio that has the right risk profile for your risk appetite and this current environment. 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. Remember that regardless of positive or negative, it's only a fraction of a percentage and not likely to last very long. A transient -0.0025 is very different from a long term -2.5 > I was brought up to work diligently, not take on debt, and save - a simple approach to building wealth This is a lie told to the lower class to have them work like slaves. That's not how wealth is generated anywhere on earth. Wealth is created by "luck" ( finding oil, discoveries, stealing/confiscating, etc ) or using capital ( inherit it, borrow it, steal it, whatever ) to hire others to generate value and give those "others" as small a piece of the generated value as possible ( without the others turning on you ) and keeping the rest for yourself ( aka wealth ). Imagine you and your 3 brothers make 10 pizza pies. If you can get them to take 1 pie each and you keep 7 pies, you just generated wealth. Congratulations. > but I'm concerned that will put me at a disadvantage under an economic system with negative rates. If you have to ask "How to prosper under negative interest rates?", then you are already disadvantaged and nothing is likely to change that. Negative interest rates, positive interest rates, it really doesn't matter for the average joe. Why not just live your life instead of worrying about things outside of your control? Ultimately, it all balances out. Sure, your savings account might not pay decent interest, but your mortgage or student loan interests will be lower. Somewhat of a tangent but negative interest rates are associated with currency deflation. 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. Here's what I'm looking at... 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 was already in the market for investment property 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. I hear you, and I've had similar feelings. I certainly don't want to profit from someone's tragedy, but I feel a little better knowing I was already in the market before this virus came along. 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. How is it predatory? The person who is renting likely does not have the ability to purchase and you adding another rental to the market drives rental prices down and provides another rental option (albeit insignificantly) thereby helping said renter. At the end I get a condo and the renter gets nothing, that's just so backwards to me. They get shelter. Even taking as given that they should have to pay for shelter beyond the cost of maintenance, all that could all exist without me getting to skim in the middle. > I was brought up to work diligently, not take on debt, and save Just keep doing that. Let's talk a worst case. Say coronavirus lasts 18 months and negative interest rates last that long afterwards too. That's three years of negative rates. If it's in the 1-2% range, That's about 3-6% lost by keeping it in cash. So your worst case is 3-6% lost. Compare that to not working diligently, taking on too much debt, or not saving enough, your worst case of 3-6% is a drop in the bucket. We're likely to do much better than that worst case. I would, however add an item to your list which might be implicit. Invest your long term savings once you have more than a solid emergency buffer. Find a robo-advisor if you want to keep it simple. In 30 years it'll have grown a ton. Great question. Probably it's a good moment to think about what we are doing and how to improve it or change it. We are traversing an historical moment in several fronts and we need to learn and go forward. Not only one answer, not only one recommendation. 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. Thinking about the same and doing a deep dive in real estate actually (not thinking of investing through funds but rather doing buy-to-let). Any solid resources / strategies recommended for a complete beginner? The easiest and least exciting answer is to buy treasuries now as rates have not hit rock bottom and if the crystal ball said interest rates were lower in the future, bonds bought now would raise in value just like in normal times. Someone bought a 50 year government bond in Austria I think and the interest rate moved a smidge and the value of his bond went up a whopping 50% 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. > "Someone bought a 50 year government bond in Austria I think and the interest rate moved a smidge and the value of his bond went up a whopping 50%" This can go the other way too. If interest rates rise a smidge, the value of these bonds can plummet. For the most part, the standard strategy still works fine; spend less than you earn, keep an emergency fund, invest in low-fee stock/bond funds like the ones recommended here https://www.bogleheads.org/wiki/Three-fund_portfolio. As real interest rates go lower, the cost of capital goes down. That would make some capital intensive businesses possible/profitable that wouldn't be otherwise. > 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. 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. I'm going to oversimplify here, but negative interest rates effectively mean you pay the bank to store your money. So on top of inflation, you're losing real money. For someone who saves, negative interest rates mean savers end up with less money at the end of each year, and since OP indicated their preference to saving, that puts them at a disadvantage. 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. Curious to hear other people’s thoughts but don’t think you can look at negative rates in a vacuum, but rather also have a view on inflation as well as asset prices (housing, equities, etc) E.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... Low interest rates mean that you need more risks for the same return. It means investing a portion of your savings in emerging market bounds, corporate bounds, stocks, real estate. 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. I would never advise anyone to do that yet with a substantial amount of their wealth, but: take a look at MakerDAO's DAI. It is a stable crypto token that uses a basket of ethereum-based tokens to keep its value locked to the US Dollar. It also provides a system where DAI holders can lock their assets and receive 2%/year. So, if your concern is just to get a positive savings rate, you could take a look at it. I recommend you to read the book `intelligent investor` by Ben Graham. 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. Much as I like that book and want it to be true - some argue that Value investing is as useful as Technical Analysis - which puts it at just a bit more reliable than Chicken Bone divination. If you have a deflation and negative rates then you should hold to your money because year after year everything around you is getting cheaper. So delay consumption. Hold the cash. You will get better deal next year. If you have and inflation and negative rates then this is just a temporary anomaly in monetary policy. Don't hold the cash. Borrow at fixed rate and invest risk free. This is one take —- 0% or negative interest rates are a signal that future consumption is more expensive than current consumption. 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. Looking into "averaging down" or "tranching in" and go into SPX. Unless you know how to thoroughly invest in companies, you're betting on the US economy recovering at some point. Statistically significantly higher returns than any other option out there. I’m a fan of investing in myself when inflation is high or rates are low. Education, or opportunities. Also a good time to shop for a credit card with a better rate. Chinese bonds? Yields were not bad as of late The thing about prospering under negative interest rates is that Epstein didn't kill himself. Why does 0% interest rate mean that it's hard to prosper? Create value. Good question. I’d like to hear people’s thoughts too.