#SameOrDifferent: Investing vs Collecting

Wednesday, March 4, 2020

This is our series: Same or Different. Something we all know from comparing Summer to Winter.

Investing or Collecting? You can spend your money just once, dont you? Well, correct in general. But never in history both topics were closer to each other than currently -- in times of negative or close to zero returns on "risk free" investments.

Back then, when you earned 4% pa. on a risk free investment like AAA-rated bonds, your loss on a collection of tangible, non-interest bearing assets, was exactly this opportunity cost of 4% each year -- given you did not have any other changes in value, which are ex-ante simply unknown, of course. Fine.

Now, today the situation is slightly different. Let us have a look at the rates for 2y bonds in different countries, as I am writing:

Canada: +0.892%
Germany: -0.842%
Japan: -0.27%
Switzerland: -0.944%
UK: +0.203%
US: +0.637%
Now, why choosing 2y bonds and not 10y bond rates? The reason is easy: the downside price risk is extreme in my opinion when buying 10y bonds at the current rates and thus current bond price levels. The simple fact, that rates were lowered steadily over the last years, created immense price gains, which will diminish again when rates go up again. And especially in Europe and Japan I cannot see a lot of room to maneuver for the central banks to push rates even further down, to keep this price gains coming in future. What does that mean: In bonds we have an very asymmetric market without realistic upside but with a boatload of downside -- not exactly what I like. Also, I think 2y bonds reflect the liquidity of a collection pretty well.

OK, back to our topic: Now, given these low or negative rates, we see either just very low opportunity costs for creating and holding a collection of tangible assets, or we even have a gain from doing so -- especially in Japan, Europe, where rates are straight negative with persistence --, assuming no price variation.

And one more point to add: a collection of tangible assets usually has no counterparty risk. This point might be irrelevant, especially in the moment when all looks bright and well and one is acting as the guarantor for the other and the other is guaranteeing the ones performance, sure. But we have seen in 2008 how fast the stress in a fragile system can increase.

Clear, all that is nothing new and everybody knew before reading these lines. Sure. But either it is not true or people act different -- this is told by bond prices and only marginal raised prices for many tangible assets. These tangible assets with prices lagging the majority of asset prices, are what gives you joy and upside potential -- today and tomorrow. Plus Ultra.

See the other parts in this series here: #SameOrDifferent