Monday, September 16, 2019

What Do Alan Greenspan, Warren Buffett And Jim Cramer Think About Negative Rates?

Everyone's talking about negative rates, but it's hard to find two people that are willing to say the same thing. In light of this, I thought it might be prudent to see what Alan Greenspan, Warren Buffett and Jim Cramer have to say about negative rates. As on overview,
  • Alan Greenspan thinks negative rates are a sign of an aging population.
  • Warren Buffett thinks that if interest rates are nothing, values can be almost infinite.
  • Jim Cramer thinks negative rates are a sign that we're not in a robust economy (talk about stating the obvious).

Let's start with Alan Greenspan.



Greenspan thinks negative rates are a sign of an aging population.


What's his logic? You can't have negative rates unless you have buyers. Greenspan thinks the buyers represent an aging population that's willing to pay money to secure their cash for the next 20-30 years.

After an awkward start, the host asks Greenspan:
What about the notion of the economy weakening?
Greenspan's response,
It's going to depend in large part on the stock market. We underestimate the wealth effect on the economy...
But then adds,
Overall the economy seems to be sagging.
These feel like conflicting statements, but I digress.

Later, when asked about what negative rates signify, Greenspan had this to say:
What it signifies is that the world population is aging. People are recognizing that they are dying off at a much later date than when they contemplated when they started to save.
He goes on to make a quick comment on gold (XAU):
One of the reasons gold prices are rising so much... that's telling us that people are looking for resources, which they know are going to have a value 20 or 30 years from now as they age. And they want to make sure they have the resources to keep themselves in place. That is clearly the fundamental force that's driving this, but we don't know how far it will go.
This makes sense from an economics perspective, but it assumes negative rates are a common market phenomenon. They aren't.

Warren Buffett disagrees with Greenspan as well.

In an interview on CNBC, Buffett had the following to say about negative rates:
What's happened with interest rates is really extraordinary. You could go back and read everything that Keynes wrote, everything that Adam Smith or Ricardo or Paul Samuelson -- you won't see a word about sustained negative interest rates. I mean we are doing something the world has never seen. It does have the effect of making assets more valuable. Interest rates are like gravity in valuations. If interest rates are nothing, values can be almost infinite.
He goes on to explain what impact negative rates are already having on his company:
So Berkshire Hathaway (#BRK.A) is sitting with billions of dollars of euros in an insurance company in Europe and they will bear a negative rate. We would be better off putting them in a big mattress that we could stick it in -- if I could just find someone that I trust to sleep on the mattress.
If we have a billion euros at minus 35 basis points, it would be $3.5 million euros a year that it's costing us just to have that....It [negative rates] distorts everything...we do not know how this movie plays out.
$3.5 million euro for sitting on a mattress? You can trust me, Buffett. If you're reading this, I've got your back.

He follows up with some Buffett wisdom, spoken like the king of insurance that he is:
In economics the most important thing to remember is that you always want to ask yourself "and then what". After anything that happens, if someone tells you that "this" thing is going to happen, there's always the need to ask "and then what". And then what? In terms of sustained low interest rates the answer is, I don't know.

Jim Cramer does. He thinks thinks negative rates are a sign that we're not in a robust economy.


In response to Trump's negative rate tweets, Cramer had this to say:
I want them to cut rates, but negative rates though, we don't want negative rates. That's just a sign that we're not a robust economy.
To which the host responded:
Is bonehead appropriate for a Fed chief that he appointed?
Cramer:
He appointed him, that was his appointee.
Host:
Yes, it was, well as we all know he tires of people quickly.
Cramer:
Yes.
Host:
In this case though, he can't fire them. Because one would think, given the frequency of Tweets, if he could, it would have happened a long time ago.
Cramer:
David, I think you got a keen eye for the obvious there partner.
Host:
Thank you. Yeah, a keen sense for the obvious is what I've made a career out of.
Cramer:
Yeah, you really have.
Gotta love that Cramer. Let's skip forward a bit to see what he really thinks about negative rates:

Host:
And now you have JPMorgan's Diamond saying they're preparing for zero interest rates. Lowering their guidance on interest income.
Cramer:
Yeah, but I was looking on Twitter and someone also posted that they're looking at 5% yesterday, and it was the best Tweet of the day because it just shows that they're prepared for anything or you could say that they don't know what they're doing.

Takeaways

The truth is, negative rates have been around for a while. Denmark’s policy rates fell below zero in July 2012, followed by the European Central Bank, the Swedish Riksbank, and the Swiss National Bank. Japan set its leading policy rate below zero on January 29, 2016. Now there's over $20 trillion in negative yielding debt in the world (both central banks and corporate). Put another way, banks and corporations around the world are already making money on $20 trillion in debt/cash they issued. It's really a brilliant scheme when you think about it.

What do I think? I think this makes me want to avoid Treasuries and buy bitcoin (BTC), gold and real estate.

That said, negative interest rate policy (NIRP) is a last-ditch attempt to generate spending investment. When combined with more QE, it makes asset prices go through the roof, as Buffett said. At some point, central banks will run out of assets to buy, but if rates do go negative, the market is about to have one last run and that run is going to be explosive.

I think that's the essence of this. If there is ANY one major takeaway from these three views on negative rates, it's that you need to be prepared for anything because what started out as a short-term emergency experiment has become the new norm. And now that new norm has created the need for more short-term emergency experiments because what used to work has stopped. As Buffett would say, we have run out of "and then whats".

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