Been wanting to write this post for a long time but now finally I get to write about it, negative interest rates! Let’s begin.

Negative interest rates goes against economic theory. It is a literal smack in the face, a sucker punch. It is only rational that you can compensated for saving money but nope not anymore. This is a real twilight zone situation and no body knows how it will end. For now, we know that we have not imploded yet but there are signs of imminent doom growing.

First, investors are flocking to riskier assets that may cause a potential bubble. Bubbles will always be there but given that the central bank does not have many tools left, who will save the world if the bubble pops? We may finally have the mother of all cleansing that we should have had. Just like forests, suppressing occasional fires, only creates a larger tinder that can become an instant lake of fire.

Second, market prices are less efficient due to negative interest rates. We learn a lot from market prices. It is like a barometer and a GPS about the state of the economy. However, with negative interest rates, some assets keep rising defying valuation and others never seem to recover despite its value proposition. In essence, the price is not being very informative. This is a big problem because it leads investors to make distorted decisions leading to improper allocation of assets.

Third, negative interest rates are hurting the old people, the pensioners that rely on interest income. Old people are really in a tough spot given that their main source of income, interest income that pays the pension is almost nonexistent.

So what can be done? Well, the easy answer is let the markets do its thing. Yes, there may be a collapse but this is what we should have long time ago. More intervention will not fix anything. However, such solution is not politically feasible. So what can be done? Well, do not expect much from the government given that we are in this situation because of too much intervention. Here are some suggestions that we can take today.

  1. Buy gold. Yes, gold is king when things are uncertain. Gold is not the only thing that glitters but gold will be accepted everywhere.
  2. Keep cash. In case of a market crash, cash will be very helpful in buying undervalued assets.
  3. Have other sources of income. With things becoming more competitive and uncertain, it is better to have diverse streams of income. If possible have a rental property or other sources of cash flow. If not, working in the demand economy is a good choice (e.g. Uber, Task Rabbit).
  4. Buy somewhat durable goods in bulk. You can actually get good yield if you buy in bulk. For instance, buying detergent and toilet paper in bulk offers as much as 20% discount.
  5. Grow your own food. This may sound too hipster or hippy but it is not a bad idea to grow some stuff at home. It is fresh and convenient. Also, it is probably healthier without the pesticides and herbicides. And it has good therapeutic values.

Nobody knows the outcome of negative interest rate era but those who are better prepared will surely be better off in the long run.