Howard Marks: The Negative Interest Rates Memo

The famed money manager addresses negative interest rates in his latest memo.

Howard Marks has released his latest memo. In the lengthy note marked “Re: Mysterious,” he talks about the impact of negative interest rates. More importantly, he talks about how little anyone knows about a world where the U.S. has negative interest rates.

Marks notes the obvious: Negative rates are bank charges for depositors to keep their money at the institution. Economists offer plenty of reasons why negative rates exist in today’s world. But Marks smartly acknowledges that no precedent exists. Therefore, “no one should feel the reasons for negative rates are fully understood.”

Marks continues by stating that the term “negative interest rates” really doesn’t mean anything. The unknown of why these rates exist today, how long they’ll persist, and what factors could finally turn them positive is very real. So too are questions about whether they’ll hit the U.S. and the consequences of such policy or market behavior.

Howard Markets: Negative Interest Rates Turn Finance Upside Down

Howard Marks notes that the bulk of financial actions are based on assumptions made on past behavior. He also outlines ten reasons why they turn traditional financial processes upside down. They are:

  • Increase in risk-taking due to lack of “safe” alternatives that offer negative returns
  • People will want to pay bills sooner than later as float benefits disappear
  • Companies no longer aim to collect receivables immediately.
  • Added pressures on fixed or investment-based incomes
  • Lack of evidence that negative rates drive inflation or consumer spending – as Europeans have increased saving due to increased uncertainty.
  • Rising equities tied to lack of income-driven options could fuel increased populism and anger at wealthy investors.
  • Distortion of floating-rate financial products.
  • Distortion of discounted present values. For example, pension obligations exceed future value when the discount rate is negative.
  • Bank profitability is hurt on loans
  • Accelerating the demise of the Social Security Fund.

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November 20, 2019

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