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The Coming Bear Market: Part II How to Prepare
Issue #492, October 16, 2017

Some Observations on Cemeteries
Issue #Interim Bulletin #491A, October 12, 2017

The Coming Bear Market: Part I: The Myth of Buy and Hold Forever
Issue #491, October 09, 2017

The Market makes New Highs
Issue #490, October 02, 2017

The Importance of a New High
Issue #489, September 25, 2017

A Little Insurance: Wealth, War and Wisdom
Issue #488, September 18, 2017

Some Observations
Issue #487, September 11, 2017

How to be Successful in Your Career
Issue #486A, September 07, 2017

How NOT to Buy a Home
Issue #486, September 04, 2017

This Week in the Market
Issue #485, August 28, 2017

Is the “Trump Bump” Running Out of Gas?
Issue #484, August 21, 2017

Gold is on the Move
Issue #483, August 14, 2017

The Importance of Estimation
Issue #482, August 07, 2017

Buying Art and Collecting: Part II of II
Issue #481, July 31, 2017

Buying Art and Collecting in General, Part I of II
Issue #480, July 24, 2017

Physicians need to be More Forceful: Follow-up
Issue #479, July 17, 2017

Physicians need to be More Forceful
Issue #478, July 10, 2017

Your First “Real” Investment
Issue #477, July 03, 2017

Leasing a Watch: Don’t
Issue #476, June 26, 2017

The Importance of Your Children having a Job
Issue #475, June 16, 2017

The Problem with Medical Student Debt is—the Med Schools
Issue #474, June 12, 2017

Critters and Varmints in your Home and Yard
Issue #473A, June 07, 2017

Leveraged ETFs
Issue #472, May 29, 2017

Leasing a Vehicle: Don’t!
Issue #471, May 22, 2017

Issue #470, May 15, 2017

More on Buying Jewelry
Issue #469, May 08, 2017

Buying Jewelry: Gold, Diamonds and Pearls
Issue #468, April 30, 2017

Thomas Sowell: Part III of III
Issue #467, April 24, 2017

Thomas Sowell: Pat II of III
Issue #466, April 17, 2017

Live Close to Where You Work
Issue #465, April 10, 2017

Medtronic in Hospital Management
Issue #Interim Bulletin #464A, April 07, 2017

Thomas Sowell: Part I of II
Issue #464, April 03, 2017

A Political Contribution a an Investment: Part II of II
Issue #463, March 27, 2017

A Political Contribution as an Investment: Part I of II
Issue #462, March 20, 2017

Buffett Selling Vacation Home
Issue #461, March 13, 2017

Advanced Placement (AP) ourses
Issue #460, March 06, 2017

The Importance of a Credit History
Issue #459A, March 02, 2017

A Credit Card Scam
Issue #459, February 27, 2017

The Electronic Health Reord
Issue #458, February 20, 2017

Issue #457, February 13, 2017

Platinum and Palladium
Issue #456, February 06, 2017

Economic Outlook for 2017: Part II of II
Issue #455A, February 02, 2017

Economic Outlook for 2017: Part I of II
Issue #455, January 30, 2017

A Story From Vegas
Issue #454A, January 25, 2017

Land Donation Deals and the IRS
Issue #454, January 23, 2017

The Theory of Gambler’s Ruin
Issue #453, January 16, 2017

Student Loans: But Wait, There’s More!
Issue #452, January 13, 2017

A Second Home
Issue #Interim Bulletin #451A, January 04, 2017

The Consumer Confidence Index
Issue #451, January 02, 2017

Social Security
Issue #450, December 26, 2016

My Outlook for 2017: Part II of II
Issue #449, December 19, 2016

My Outlook for 2017: The Market
Issue #448, December 12, 2016

Medicine in 20 Years
Issue #447, December 05, 2016

Higher Interest Rates
Issue #446, November 28, 2016

Trump and the Markets: The Bad and Ugly
Issue #445A, November 23, 2016

Trump and the Markets: The Good
Issue #445, November 21, 2016

Negative Trends: The Suits aren’t Makin’ Steel
Issue #444, November 16, 2016

The New DOJ Fiduciary Rule
Issue #443, November 07, 2016

Barron’s Conference, Part IV of IV
Issue #442, October 31, 2016

Barron’s Conference, Part III of IV
Issue #Interim Bulletin #441A, October 26, 2016

Barron’s Conference, Part II of IV
Issue #441, October 24, 2016

Barron’s Conference, Part I of IV
Issue #440, October 20, 2016

This Newsletter
Issue #439A, October 12, 2016

Memoirs of US Grant: Vol II
Issue #439, October 10, 2016

More Points on Collecting, Investing and the Economy
Issue #Interim Bulletin #438A, October 05, 2016

Personal Memoirs of US Grant
Issue #438, October 03, 2016

Ideas for a High School Part-Time Job
Issue #Interim Bulletin #437A, September 29, 2016

Collecting, Investing, and the Economy
Issue #437, September 26, 2016

Free College
Issue #436A, September 22, 2016

A Military Commitment to Pay for Med School
Issue #436, September 19, 2016

When a CD isn’t a CD
Issue #435, September 12, 2016

I Made a Mistake
Issue #Interim Bulletin #434A, September 07, 2016

What is Your Spare Time Worth?
Issue #434, September 05, 2016

Credit Cards and Bonus/Loyalty Points
Issue #433, August 29, 2016

The Write-off of Student Loans
Issue #Interim Bulletin #432A, August 25, 2016

412 Retirement Plans
Issue #432, August 22, 2016

Join the Club
Issue #Interim Bulletin #431A, August 18, 2016

The Case for Precious Metals and Hard Assets
Issue #431, August 15, 2016

When the US went off the Silver Standard
Issue #430, August 08, 2016

Why NOT to Open a Restaurant
Issue #429, August 01, 2016

Some Tips on Life Insurance
Issue #428, July 25, 2016

More Observations on Negative Interest Rates
Issue #427, July 18, 2016

Issue #426, July 11, 2016

Is a PhD Worth It? Part II of II
Issue #425, July 04, 2016

Is a PhD Worth It? Part I of II
Issue #424, June 27, 2016

Avoid Part-time real Estate Agents
Issue #423, June 20, 2016

Issue #422, June 13, 2016

The Problem with Auction Reserves
Issue #421, June 06, 2016

Make Full Use of Your Capital Investments
Issue #420, May 30, 2016

The Fed’s Announcement
Issue #419, May 23, 2016

Quit While You’re Ahead: A True Story
Issue #418, May 16, 2016

The Precious Metals
Issue #417, May 09, 2016

Negative Secular Trends: Part Ii of II
Issue #416, May 02, 2016

Negative Secular Trends: Part I of II
Issue #415, April 25, 2016

Not Winning is not the same as not Losing
Issue #414, April 19, 2016

Behavioral Economics: Part II: Weaknesses
Issue #413, April 11, 2016

Behavioral Economics: Part I: Valid Points
Issue #412, April 04, 2016

The Most Important Books I’ve Read
Issue #411, March 28, 2016

Secret to Success: Take Risks and do Things Differently
Issue #410, March 21, 2016

The Over-Priced Food Presentation Hustle
Issue #409, March 14, 2016


By Robert M. Doroghazi, M.D., F.A.C.C.

Negative Interest Rates

Issue #394, November 30, 2015

    It’s good advice that the first thing to do in a presentation or paper is tell people what you are going to talk about. You make your main point and then go about proving it.
    I’m going to do the opposite: I will tell you straightaway what I am not talking about. This newsletter is not about “real” interest rates, which is the rate of interest paid minus inflation. In the good old days of the gold standard, when the inflation rate was basically zero and a railroad bond (considered the safest investment of the day) paid 4%, the real interest rate was +4%. In the late 70s, when interest rates were, say 7%, but inflation was 10%, the real rate of interest was -3%. Positive interest rates are good for creditors because they make money, and good for savers, because their thrift is rewarded with an increase in purchasing power. Negative real interest rates are bad for creditors and good for debtors, because cheaper dollars are paid back than were lent. Gold, and hard assets in general, prosper when real interest rates are negative, because they are considered a way to preserve wealth.
    Rather, I am talking about “nominal” interest rates. There is no adjustment for anything: the number you see is the number you get.
    Two weeks ago the Germans sold a 2-year bond with an interest rate of - 0.38%. People are paying the German government 0.38% per year just to hold their money. In Germany, you need to go out to about 8 years to get positive rates. Other Euro countries, including Switzerland and France, also have negative rates on shorter maturities. 
    What are the implications of negative interest rates?
    1) The central banks are using negative rates to spur commercial banks to lend, rather than keep money on deposit at a loss. And it’s not working. How about that: another policy dreamed up by central planners that isn’t going as anticipated.
    2) Why would people willingly accept an assured loss? Because they fear real, Great Depression-like, deflation, where prices fell 25% in 4 years. Cash was king. If prices fall 3% per year while you lose only 0.38%, you have gained 2.62% in purchasing power.
    3) On a practical level, consider money market accounts. Before the Fed clamped interest rates at zero, you could make a little on a money market account. But their real functions are 1) liquidity: your money is instantly available. You can write a check, send a wire, or even draw it out in cash. 2) But more important is safety. You put in a dollar, you expect you would get a dollar back. 
    Just as with any business, money market funds have expenses. With interest rates so low, some companies have been forced to exit the money market business. Larger companies are eating the losses to keep the option available for their clients. Ex: would you have your $2M IRA at a company with no money market account? Where do you put the proceeds of a sale?
    In the 2008/9 financial crisis, things got so bad there was a real fear that the money markets would have to “break the buck”, the fund’s value would fall below $1. The government stepped in to guarantee the funds (? a mistake). If interest rates go any lower from here, the funds will be forced to mark the money market funds to market, i.e., the value of the fund would float, and thus could go below $1.
    4) Savers would get hosed, as they have been for almost a decade now. Why bust your chops to save money? You buy a 2-year Treasury for $10,000, and 2 years later you get a check for $9,924. It makes no sense.
    Jeff Gundlach mentioned negative interest rates at the recent Barron’s conference. He had previously asked people how negative an interest rate would they accept. The consensus was at most -2%. So what would they do with their money? Although I no longer have my notes, as I remember, most said real estate.
    He then posed a scenario to show the absurdity of this situation. If interest rates went negative, and you could convince people you were the most credit-worthy borrower in the world (like the US government), the more money you borrowed, the more you would make!! The government could even pay off the debt if they could borrow enough.
    I hope we don’t see negative interest rates in the US. 
    What is the best day ever (in percentage terms) in stock market history? Answer at the end of the newsletter.
    These points are from “Housing Wealth Recovers, but Wanly” in the Wall Street Journal on 11/23/15.
    Housing equity has doubled to $12.1T since prices hit bottom in 2011.
    RMD comment: the goal behind QE was to increase wealth = increase the value of stocks and homes. Since the poor don’t own either, many feel that QE has been the greatest driver of the increasing disparity in wealth in the US.
    Home equity loans have recently increased, but are only a quarter of what they were before the housing bust.
    RMD comment: I believe that Home Equity Loans are one of the cruelest inventions of our financial system over the last quarter century. Your goal should be to pay off your mortgage as quickly as possible, not use your home as a piggy bank. I know a couple who bought a very modest home in 1980. They are now approaching retirement, and thanks to the magic of home equity loans, they still owe more on the mortgage than they did 35 years ago. Cash out refinancing, where the borrower takes cash when they refinance, is just as stupid and destructive.
    The problem is that banking has changed. In the past, bankers were loaning the money from their depositors, and ultimately, their own pocket. They kept the loan on their books, and if it went bad, they were stuck with it. Character was paramount. As the (now) old saying goes, banks only loaned money to people who didn’t need it.
    Now banks loan money to people who really do need it, and look what happened. As Gomer Pyle would say “Surprise, surprise, surprise”. They can’t pay it back. Now the banks just originate the mortgage, skim the fees, and sell the loan, so it’s no longer their problem. Since the buyer is often Fannie or Freddie, it’s now everyone’s problem.
    Some time ago I gave a talk and criticized bankers for loaning money to someone they knew might not be able to pay it back, or the loan really wasn’t in the borrower’s best interests. One said they really had never considered things from that point of view. The other said if they wanted to stay competitive, they had to loan money.

    Last week I wondered what might happen if the US Dollar breaks out higher. We could find out very soon.
    I was reading about Dick Groat, NL MVP in 1960 for the Pirates, and an important part of the 1964 Cardinal World Champs. Shortstop Groat batted right, and first baseman Bill White batted left. When a lefty pitched, Groat batted 3rd and White 5th. When a right hander pitched, it was the other way around. MVP Ken Boyer hit cleanup.
    In the 64 Series, Groat played a hidden ball trick on Mickey Mantle. Groat acted as if he threw the ball back to pitcher Roger Craig, and when Mantle wondered off 2nd base, Groat tagged him out. I didn’t remember that play, so looked at my official Major League Baseball tape of the Series. It wasn’t included as a highlight.
    RMD comment: Disappointing, but not surprising that Major League Baseball didn’t want to include a play that makes one of the all-time greats look like a Little Leaguer.
    One of Roosevelt’s first acts as president after his inauguration on March 4, 1933 was to close the banks. When they reopened on March 15, tens of millions in cash and gold that had been hoarded were redeposited in the banks. The stock market had its best day ever, with the DJIA +8.26 points, 15.34%, to close at 62.10.
    RMD comment: whatever you think of Roosevelt, he restored confidence.
    I will be traveling next weekend to attend Dr. Wm. C. Roberts Cardiology Conference in Williamsburg, VA., so I’m not sure what day I’ll send the next newsletter. Maybe as early as Friday, or maybe even early the next week. 


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