GIULIETTA TALEVI: Rage against the money machine
The destruction of the interest rate has comprehensively changed the game for investors, who are now having to look at riskier assets — like equities or gold — to get any kind of yield
There’s another aspect of the Covid-19 pandemic having a profound effect on all our lives, be we pensioners, first-time savers, seasoned investors, or borrowers: the destruction of the interest rate.
For a good part of the 20th century, you could get a return on your money by simply sticking it in the bank. Buying bonds was de rigueur for any pension or market portfolio.
That changed with quantitative easing after the 2008/2009 global financial crisis and it’s been made worse now by governments and central banks, frantic to help their economies through Covid-19, slashing borrowing costs and printing money.
It means that by sticking your cash into a money market fund, or a bond, or the bank, you stand little prospect of earning very much on it.
It has comprehensively changed the game for investors, who are now having to look at riskier assets — like equities or gold — to get any kind of yield.
This is one of the reasons that gold is enjoying one of its best years since the millennium — up nearly 30% to a record $1,969 per ounce by Wednesday night.
To be fair, gold’s rise is also related to the mighty dollar — which has weakened to a two-year low as rising coronavirus cases in the US have, as the Financial Times writes, “caused investors to lose confidence in the sustainability of the economic recovery that began haltingly in May”.
Unsurprisingly, the US Federal Reserve kept interest rates unchanged at close to zero on Wednesday night, warning that the outlook for the US economy depends “significantly on the course of the virus”.
Not everyone is a fan of all this loose money. The FT has a great article on just this issue here, in which Robin Harding explores the “rage” against central banks (and why it’s misplaced).
“Anybody arguing that the Fed and European Central Bank should adopt higher interest rates to tackle zombie companies, or cool equity markets, should state clearly that a few lost decades is a price they are willing to pay,” he writes.
“The real problem is that the natural rate of interest is in decline, for reasons that are still uncertain but range from demographics to lower productivity growth.”
Incidentally, Harding quotes Judy Shelton, who is US President Donald Trump’s latest pick to join the Fed board. Famously, in 2009 Shelton wrote an essay headlined “Why do we need a central bank?”
The New York Times is not at all amused by Shelton’s nomination. You can read its opinion on it here, headlined, subtly, “God help us if Judy Shelton joins the Fed”.
The unexpected revival of Kodak
In the meantime, in the casino that is the stock market, here’s a story that may hit a nerve with South Africans who’ve had to endure the spectacle of off-the-shelf companies awarded lavish contracts to produce life-saving goods like personal protective equipment.
This story is about an old US company, one you’d never associate with Big Pharma: Kodak. Hell, I thought Kodak was dead and buried, yet it has risen, Lazarus-like, from the stock market crypt in astonishing fashion this week, helped along by thousands of excitable Robinhood buyers.
The reason? The camera company has been awarded a $765m loan to make “essential drug components” which are in “chronic national shortage”, writes Business Insider.
Trump, never one to overhype anything, described it as “one of the most important deals in the history of US pharmaceutical industries”.
It means Kodak, a company you’d think has no place in the modern world of cellphone cameras, has seen its share price soar 1,900% in just two days.
For pure bonkers, this is hard to beat.
*Talevi is the FM's Money & Investing editor.
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