Deflation / negative interest rates in Europe

[Jack]

I just read an article about how a bank in Denmark recently started issuing mortgages with negative interest rates, and how EU countries are in a deflationary environment in general. The (liberal) author's point, of course, was that the EU's monetary policy isn't working and that they need to switch from austerity to deficit spending to prop up southern Europe.

However, my takeaway from the article was to wonder what the implications are for EU index funds and whether it creates any unique investment opportunities (e.g. real estate). Thoughts?

(Please, save the admonitions about "market timing" for another thread.)

[hodedofome]

Europe has some pretty big structural problems with having a monetary union but not a fiscal one. What they need to do is make Europe more like the states/fed gov't relationship in the US. The population is also shrinking and that's a major issue to overcome.

[DrF]

The US could quickly get there. Massive boomer retirement, major decrease in babies born during the great recession. How are all those boomers going to sell their houses? Who's going to buy them? The industrialized world is facing major headwind with not enough young people to support the old with the current social programs in place.

[SaintM]

Europe has some pretty big structural problems with having a monetary union but not a fiscal one. What they need to do is make Europe more like the states/fed gov't relationship in the US. The population is also shrinking and that's a major issue to overcome.

I would argue the other way and revert to national currencies.  Britain and Switzerland were smart by keeping the pound and franc.  Absent major reforms either way (single monetary and fiscal union -or- completely separate systems) the Euro is a failed concept.

[hodedofome]

Sure, they could go back to the old way. But I would think a complete union would be more efficient. And, it would probably stop a war or two.

[Jack]

So what do these things mean from an individual investor perspective?

[LSK]

I think it's important to distinguish the EU and Denmark a bit to understand the situation. Denmark do not use the Euro, but have locked our currency to the Euro, like Switzerland had. Right now speculators are trying to pressure the Danish krone and see if we'll buckle like Switzerland did, but all indications seems we won't and have a very different setup than Switzerland did (public national bank and a long history of having the krone locked to the Euro (D-mark before that) vs Switzerlands private and short history of ditto). That is why our national bank issues negative interest rates, to make it less appealing to buy kroners and drive the price up.

What it means for investors is morgages are really really low interests here. They are closing various morgage bond products right now, because they are not allowed to issue then with negative interest rates. We're currently looking at converting (again) from a 3% 30 year morgage to a 2% 30 year loan, but maybe we'll even see a 1,5% 30 year loan soon, if this keeps up.
Along side really cheap morgage loans, I still see our global investments go up, so far so good.
So if you're interested in buying a property here, now is a good time to get a really cheap morgage, if you're interested in that.

[aj_yooper]

This from Vanguard too:  http://www.cnbc.com/id/102324443

A view of Japan's deflationary times:  http://www.nytimes.com/2010/10/17/world/asia/17japan.html

Interesting topic.  Thanks.

[FFA]

So what do these things mean from an individual investor perspective?

my views for what their worth :

1. it means we're far from out of the woods of the 2007-8 crisis, despite the impression you might get if you just look at the dow J chart alone. While the EU is no longer in crisis it is far from healthy. when people are willing to pay money to the Govt to take their money, something has gone haywire! Finland is now the latest (and first at via a primary issue) to sell a 5 year bond at negative yield, despite their economy being in recession. Even corporate bonds (nestle) have now sold at negative yield this week. Obviously with the globalized economy these days, this effects everyone not just Europeans. So individual investors need to be mindful there's still a lot of risk in the global economy and high volatility could be just around the corner once again. It's important to have a plan and stick to it!

2. I've seen a few articles trying to explain who would want to buy negative yielding bonds. It can be companies that have to for legal/policy reasons (e.g. insurance companies, banks, bond index funds,  ..), speculators front running the ECB before they start the QE program (this has been going on for a few years already, that's probably how we got here!), people scared of deflation and can't store physical cash safely, ... Personally, I'm not in any of these categories and as an investor I wouldn't want to hold negative yielding bonds. Therefore i'd be checking if I have any exposure to global bond/FI index funds and switching out of those and into my home country fixed interest (assuming that is positive), where-ever possible.

[johnny847]

Europe has some pretty big structural problems with having a monetary union but not a fiscal one. What they need to do is make Europe more like the states/fed gov't relationship in the US. The population is also shrinking and that's a major issue to overcome.

I would argue the other way and revert to national currencies.  Britain and Switzerland were smart by keeping the pound and franc.  Absent major reforms either way (single monetary and fiscal union -or- completely separate systems) the Euro is a failed concept.

From my admittedly limited understanding of all of this, I concur. At the beginning of the Euro, the constituent countries' economies were doing well, so it was great. But now that the Euro zone is doing poorly, it's not working out, especially because some Euro zone economies are doing better than others, so the ones who are better off end up subsidizing the ones who are worse off.

Because these are countries, and not states, they should just get rid of the Euro. It's not like in the US where the federal government can force the states in line if they need to.

[TreeTired]

For me,  as a long time bond trader and now bond investor,   it makes me less bearish on US interest rates,  even with 10 yr rates under 2% and the long bond at 2.40%  (after touching 2.25%).   In the past I would have called these rates "ridiculous" and would have scaled out of long term holdings at 2.75% and 2.5%,  but this time I feel differently,  because if European investors are faced with negative interest rates on bonds, surely they will be a large source of demand for our bonds.    I am sure as heck not "loading up" on US long bonds at 2.45%,  but  I do shake my head a bit at the ongoing forecast of higher US rates, lower bond prices and comments such as,  "our bond rates are so low they can't go any lower."  .... maybe,  maybe not.