The Telegraph (U.K.) had a terse description of JPM’s Chief Investment Office that helped crystallize my thinking:
The bank stunned Wall Street when it disclosed that a series of bets made by the CIO on the health of major companies had triggered the . The CIO’s job is to invest deposits that the bank has yet to lend.
Let’s think through the implications of the second sentence (note the first sentence is correctly copied; the editors dropped or missed a word or two at the end of the first sentence). In order to accept deposits and pay an interest rate marginally above zero, JPM and other big banking companies need (want) to put these “excess” deposits to work, because they have a mismatch between savings and lending opportunities. Regular readers of this blog will recognize this phenomenon as the Japanese term “yotai gap”, on which I reported early last summer as part of my inveighing to investors that they hie themselves out of stocks and commodities and into Treasurys (LINK, also more recent LINK).
When that first article was posted, on June 26, 10- and 30-year T-bonds were yielding 2.87% and 4.17%. Out of curiosity, you may wish to calculate the price gains if one had purchased zero coupon bonds of those durations on June 27 last year and held them until now. (They are enormous.) It is those price gains that have led to the current mini-bubble in housing stocks (LOL!).
In any case, as part of the continuing trend toward a more restrained financial environment, JPM is promising to speculate less with these insured deposits. Yet there are costs to insurance and maintaining deposits. Let us say that you, dear reader, are blessed with hundreds of thousands of “excess” funds that you wish to keep safe as a cash equivalent (or that a business needs to safeguard millions of dollars); or more realistically, you have saved thousands or tens of thousands of dollars that you truly need as a rainy-day fund. Unless you live in a fortress, you will probably be nervous about keeping them at home. Will you be willing to go from accepting, say, 0.20% positive interest payment from a bank to a negative 0.1% payment from you to the bank to keep these FDIC-insured monies both secure and available to you on demand?
If you are a small saver, you may assess the chance of theft or fire should you keep your funds at home as greater than 0.2% and accept this storage fee. If you are a large saver and do not already bear the costs of maintaining a fortress, you will correctly judge that the costs of creating one far exceed this fee, even if it should be imposed upon you despite your large deposits.
Your risks further multiply when you look at the recent scandals at PFGBest and before that, MF Global. You will then perhaps investigate what “SIPC” really is in the brokerage field. (Hint: SIPC is not a government agency and it has a limited capital base.) Then you will look at the stock market that arguably, in the Japanese analogy, has another 50% downside risk, and question how much of your savings you can put at risk in “the market”.
Especially at a time when the Billion Prices Project has again tipped into “deflation” (end of May is the latest available data), you and I and everyone else will just have to take the market rate. Under the theory that money is a commodity, albeit an extraordinarily special one, and there are real costs to store rather than consume a commodity, it is only natural that a storage fee be assessed. This is the “old normal” masquerading as some “new normal”. Negative interest rates, aka storage fees, are normal on “real money”, as gold investors have known and not complained about forever.
The implications of this trend are enormous. They may represent a secular rather than a cyclical trend. If this is so, I expect that tax-exempt bonds will trend higher in price from here (lower in yield), as will the stock prices of plain vanilla utility stocks with what are viewed (rightly or wrongly) as having “rock-solid” dividends.
I am not predicting “deflation”. I am talking only about prices of securities (bonds and stocks with “bond-like” characteristics; and about the “price” of “money”). The term “security” has as its obvious root the word “secure”. Sorry, much as I admire the business success of Apple, ExxonMobil etc.etc., there is nothing “secure” about their dividend growth (or even payout), and certainly not about their shares’ trading prices. If you want security of your financial assets, it’s looking to me as though it will cost you in nominal terms if you also want guaranteed liquidity. Whether the prices of things you have to or desire to purchase with these funds rise or not is somewhat of a separate matter.
Savers are between the proverbial rock and hard place. The prudent look in vain for easy solutions to this dilemma. It turns out that there are none.
The good news is that there are more important things in life than money and investments. The other positive thing I can report is that the world is always changing. The times will get better- some day.