How hated is cash? Maybe you thought it was just the academics and the financial authoritarians that are trying to get rid of it. No. It’s investors too. There are some investors who hate cash so much they’re willing to lend money to a public company at negative interest rates.
Stop the madness! End QE now!
Seriously. I’m not making this up. Here’s the story from Christopher Whittall in yesterday’s The Wall Street Journal. It’s two European companies reacting to the European Central Bank’s new corporate bond buying programme. The Wall Street Journal reports (emphasis added is mine) that:
Investors are now paying for the privilege of lending their money to companies, a fresh sign of how aggressive central-bank policy is upending conventional patterns in finance.
German consumer-products company Henkel AG and French drug maker Sanofi SA each sold no-interest bonds at a premium to their face value Tuesday. That means investors are paying more for the bonds than they will get back when the bonds mature in the next few years.
A number of governments already have been able to issue bonds at negative yields this year. But it is a rare feat for companies, which also ask investors to bear credit risk.
Madness, I repeat. Pure madness. It’s one thing to prefer the liquidity of government bonds. You can buy and sell easily over the short term. You’re not likely to hold to maturity. It’s a safe port of call for your cash in a financial storm.
But no sane investor would bear credit risk by loaning money to a publicly traded enterprise in exchange for nothing. The only explanation is that some bond investors believe that the European Central Bank will expand its bond buying programme to include even more corporate bonds. They’re speculating on price appreciation, not investing for yield.
That does make sense. But it’s still a special kind of central bank-induced distortion in behaviour. What kind of a world do we live in when the incentives are all designed for speculators? A speculative world. That’s the one.
There were $5.56 billion worth of negative yielding government and corporate bonds at the beginning of 2016, according to data from Bank of America Merrill Lynch. That was about 14% of the total global fixed income market. Now it’s closer to $13.5 trillion and nearly one-third of the entire fixed income market. There were $46.5 billion worth of negative yielding European corporate bonds at the beginning of this year. There are now over $500 billion, as companies rush to lock in the… er… highly favourable borrowing costs.
Investors shouldn’t chase negative yield corporate bonds
Why not just hold cash? Well, cash doesn’t earn a yield either. And if you’re paying a fee to a fund manager or investment advisor on money you’ve given to him to grow, you certainly don’t want him to pay you in cash. Why would you pay for someone to put your money in cash? You can do that yourself for free.
You’re in good company if you’re a cash hoarder. The world’s greatest investor thinks cash gives you “optionality”. Warren Buffett’s Berkshire Hathaway has $70 billion in cash. That’s a lot of money stuffed under the mattress. Why does Buffett like cash?
Buffett views cash as a call option with no expiration date, according to his biographer Alice Schroeder. It’s an option on every asset class. And there’s no strike price. You can read more about it in this useful blog post from Jesse Felder (hat tip Barron’s).
The investment case for cash is strong. It means you can buy assets when they’re on sale (below book value). Unless there’s rampant inflation, the cost of holding cash is the return you don’t get by being fully invested in some other asset class. That’s all making sense, right?
But if it’s making sense, you’re thinking about it too much. And if you’re thinking, you’re not spending. And if you’re not spending, GDP – as a nominal measure of economic activity – isn’t growing. Did you think the economy was going to grow itself while you sat around on your pile of cash?
It’s thinking like that that causes deflation and depressions. And that’s why economists like Ken Rogoff and Andy Haldane are coming after cash, at least in an academic/philosophical way. Rogoff was at it again yesterday in an opinion piece in which he called for getting rid of all US paper currency larger than the $10 bill. He wrote:
Cash facilitates crime because it’s anonymous, and big bills are especially problematic because they are so easy to carry and conceal… Moreover, cash payments by employers to undocumented workers are a principal driver of illegal immigration. Scaling back the use of cash is a far more humane way to limit immigration than building barbed-wire fences [no need to stop them at Calais if they aren’t coming in the first place].
In my new book, The Curse of Cash, I offer a plan that involves very gradually phasing out large notes, while leaving small notes ($10 and blow) in circulation indefinitely. The plan provides for financial inclusion by offering low-income households free debit accounts, which could also be used to make government transfer payments. This last step is one that some countries, such as Denmark and Sweden, have already taken.
Cash may seem like a small, unimportant thing in today’s high-tech financial world, but the benefits of phasing out most paper currency are a lot larger than you might think.
Don’t say you weren’t warned!
Category: Economics