The Oddities Of Economic Uncertainty

Andrea Fiano's monthly letter to you, the reader.

SEPTEMBER 2019 | VOL. 33 NO. 8

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What does it mean to pay a negative interest rate on a mortgage? And what kind of bank charges customers for having too much money for too long? Ask Denmark’s third largest bank, Jyske Bank, about the first: Its 10-year mortgage carries a -0.5% interest rate. Ask a certain Swiss financial giant about the second.

Welcome to a new era of finance, in which interest rates—already below zero in some cases—are being cut even lower. At the same time, many unprecedented consequences of quantitative easing are emerging. The longest period of economic growth in the United States is increasingly at risk.

Outside the US, right now nearly 43% of the bonds in around the world offer a negative interest rate. Yet investors have not disappeared—most probably for the lack of viable alternatives. Nobody should have been surprised that the yield curve in the US Treasury market inverted, showing higher returns for a 2-year bond than a 30-year one. It reflects high uncertainty over the future of the economy and unwillingness of investors to tie up capital for long periods.

As in the past, August brought turmoil to the financial markets. The turbulence reflects primarily the uncertainty around world economic conditions; growth is slowing pretty much everywhere, and even in negative territory in some countries, such as Germany. These factors, combined with huge tensions around trade between the US and China, complicated brinksmanship around Brexit, and turmoil in large economies such as Argentina, have put fears of recession back in the news—and in the minds of investors, executives and pretty much everyone else. We have entered, it seems, uncharted economic territory.

In this scenario, it should not come as a surprise that capital investments have stalled worldwide, as our cover story illustrates this month. Low interest rates, and a clearer economic scenario, could restart that engine of growth. But finding that clarity will take a while longer.

Andrea Fiano | Editor