RBS Bank, the Royal Bank of Scotland, annnounced today that they will begin charging large corporate customers to hold cash on deposit. That’s a first for a major bank. After all, the idea of a bank is to provide security for your money, and also pay some interest on your deposits. At least this is how it has always been since the beginning of time.
But today we live in a completely different world. Everything is upside down. Major central banks around the world impose negative interest rates: ECB (European Union), Denmark, Sweden, Switzerland, as well as the BOJ (Japan) have all imposed negative interest rates – below zero!
Finally, the banks are starting to feel the pain of eating these losses, so they are starting to transfer this pain – these losses – onto customers. It’s inevitable.
But that’s what these central bankers want. They hope that when the losses for holding cash becomes too painful, it will force companies and individual investors to invest it in stocks, bonds, real estate, etc. This drives economic activity.
The problem is, the risk-reward ratio does not justify such moves. Losing 0.1% to hold cash, or investing in over-priced asset bubbles that have the potential to lose orders of magnitude greater losses is a no brainer decision for the smart investor. Better to lose a little than risk everything and lose a ton.
However, greed is always everywhere. This is why many are chasing higher returns anywhere they can, even in these dangerous bubbles. This is the only explainable reason why the stock market continues to climb higher – despite 5 consecutive quarters of negative corporate earnings. That’s a first in history – record highs in the face of severely declining and consecutive earnings quarters. Stocks making new all-time highs in this environment is nothing short of insanity, lunacy. This is also the only explainable reason why so many government bonds around the world trade at negative yield – meaning if you hold onto them until maturity, you are guaranteed to lose money. In sane times, we didn’t call this investing; it’s stupidity if you’re guaranteed to lose money.
But this is the upside down world we live in, where negative is good.
There will always come a time when negative simply means negative. We all learned this is grammar school. When it comes to profits and investments, negative should always be bad.
One day, very soon, it will mean exactly that. Be careful in this new progressive era of investing.