Extreme monetary and fiscal experiments resulted in many markets showing “anomalies.” Things that did not exist some years ago suddenly are the norm.
It all started with negative interest rates in some developed economies. By the time they were introduced in Japan, Eurozone, Switzerland, some Nordic countries, etc., there was no precedent as to what the impact would be.
One of the consequences of extreme monetary policy is the surge in negative-yielding bonds. When countries run a deficit, they look to finance it by borrowing from financial markets. Theoretically, they should have an easy time because countries with a surplus can finance such a deficit. However, the payment terms may or may not be favorable.
However, negative yields mean that investors will get less than they invest by buying such bonds. Greece is the last country to join the negative-yielding bonds group, a stunning reversal from the situation a few years ago.
Alternative Investments – An Alternative to the Rising Negative Yielding Bonds
Investors are left with only a few choices in search of safety. One is to buy safe-haven currencies. Indeed, the JPY or the CHF are the best performing currencies in 2020 so far. But another option is to turn to alternative investments as long-term capital protection.
Another reason for turning to alternative investments comes from the inflation side of the equation. Many well-versed investors (e.g., Stanley Druckenmiller) see much higher inflation in the next five or six years than the current levels. As such, a hedge against inflation will favor an alternative investment.
Alternative investments are much more than gold and other precious metals. Nowadays, we can talk about Bitcoin and other cryptocurrencies as a safe-haven asset. Also, private equity or real estate are traditional alternative investments too. Moreover, collectibles tend to hold their value, especially during high inflationary periods.
Selecting the best performing asset from a class of assets is a balancing act. Advantages and disadvantages exist. For instance, real estate and collectibles have a big disadvantage of poor liquidity. In other words, when investors are in a hurry to get out when they need liquidities, it may not be easy to find the right buyer at the right time.
However, as negative yields conquer the world (and they are not going away anytime soon), expect more investors to turn their attention to alternative investments.