A rather disturbing thing has been happening in the investment world recently. Interest rates have been going negative for short maturity – and sometimes medium maturity – sovereign debt. This effectively means that “investors” actually pay governments to borrow money from them! I use the word “investor” euphemistically in this context because paying for a guaranteed loss doesn’t seem like much of an investment to me.
And this phenomenon of negative interest rates has been spreading. Countries such as Japan, Switzerland, Germany, Sweden, the Netherlands, Italy and Spain are currently (as of 2017) experiencing negative interest rates on short term government debt. While other major countries like the United States, the United Kingdom, Canada and Australia don’t have negative interest rates yet, they certainly seem to be slouching in that direction. It wouldn’t be a stretch to say that widespread negative interest rates in developed world sovereign bonds are almost an inevitability at this point.
This situation presents a bit of a conundrum to traditional investing strategies. Classic balanced portfolios contain a mix of stocks and bonds. But why would you allocate a portion of your money to investments like bonds that will earn you a negative return – a.k.a. a guaranteed loss? Certain institutional money managers like pension funds, endowments and banks may have no choice but to accept negative returns for some of their investments due to their official mandates. You and I are in a better position, however. We, as individual investors, don’t have to accept this ridiculous situation.
Buying stocks is one obvious solution to sidestep negative interest rates. But while this strategy isn’t completely without merit, it isn’t the panacea it may seem at first glance. For one thing, stock valuations have risen relentlessly over the past several years already. Much of this increase in price has been driven by falling interest rates. Now that interest rates are already skirting zero in most developed nations, most of the easy money in equities has already been made.
This is especially true when one considers that negative interest rates reflect a weak global economy. No rational investor will accept a negative rate of return on government debt if everything is fine, economically speaking. So this proves, prima facie, that things are decidedly unbalanced in the global economy. These inevitable future economic troubles, even if not apparent yet, do not bode well for the earnings potential of most stocks.
This leaves investors in a tight spot. The traditional asset classes – stocks, bonds and cash – are either guaranteed money losers or carry substantial – some would argue unacceptable – risk. What is a prudent investor to do? Well, there is a little known alternative asset class that still sells at reasonable prices and has good return prospects: fine art and antiques.
Whether it is a gold encrusted Edo era Japanese lacquerware box or a weighty block of gem-quality, mint-green Guatemalan jadeite jade, art and antiques are endlessly captivating. They unfailingly impart a sense of history, beauty and wealth to their lucky owners. And most antiques are far more accessible than many people believe, too. A few hundred dollars is usually enough to buy a compelling, elegant and historically important work of art. Even as little as a hundred dollars can get your foot in the door.
Best of all, negative interest rates are nowhere to be found in antique-land. Instead you can expect steady, moderate, positive appreciation for decades and decades to come. Negative interest rates may be the bane of the modern investor, but there is no reason to feel intimidated into accepting them. Fine art and antiques give a viable alternative to bubble-priced traditional asset classes that astute investors everywhere can appreciate.
