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Joe Weisenthal
This tweet, more than anything else I've said about negative yields, has pissed a lot of people off, so I'd like to offer a brief non-troll explanation of how I'm thinking about the topic...
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Joe Weisenthal Jul 29
Replying to @TheStalwart
If you think about massive wealth accumulation back in history (before the world became financialized), getting rich meant acquiring lots and lots of stuff (palaces filled with art and wine etc.)
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Joe Weisenthal Jul 29
Replying to @teasri
But as folks like have noted, in a more financialized world, the ultra-wealthy don't need to acquire lots of land and stuff. They just acquire pieces of paper (or not even paper, entries on a computer entitling them to financial assets)
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Joe Weisenthal Jul 29
Replying to @TheStalwart
But if you think about the accumulation of real assets, it's obvious that they carried permanently negative interest rates. People didn't call it as such, probably. But maintaining huge palaces and so forth was obviously an expensive, ongoing proposition. All kinds of maintenance
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Joe Weisenthal Jul 29
Replying to @TheStalwart
So now we live in a world where a handful of people have acquired Versailles-levels of paper wealth. And so it's natural and normal that at the extremes, just the maintenance of it will have a carrying cost. It's the natural way.
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Joe Weisenthal Jul 29
Replying to @TheStalwart
And if you think about the ultra-wealthy in places *today* with less mature and less stable financial systems, they're often associated with ostentatious displays of wealth (think about the stereotypes of Russian billionaires: yachts have high carrying costs)
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Joe Weisenthal Jul 29
Replying to @TheStalwart
So bottom line is it's not that weird to pay to preserve one's wealth, and if you're pushing the extremes of paper financial holdings, at the edge, the returns will be negative. Actual nominal negative yields on bonds are an extreme manifestation of it.
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Emanuel Derman Jul 29
Replying to @TheStalwart
That explains perhaps why very wealthy people have to pay storage costs but it doesn’t explain why the government collectively should borrow at negative rates
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Joe Weisenthal Jul 29
Replying to @TheStalwart
And honestly I think one can look at the gigantic size of the wealth management industry (in various forms) as evidence that carrying financial wealth has always come at a cost.
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Joe Weisenthal Jul 29
Replying to @EmanuelDerman
Because you can think of government debt (in mature developed markets) as a risk-free savings vehicle.
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Joe Weisenthal Jul 29
Replying to @TheStalwart
Anyway, that's all I meant by negative yields being natural.
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Lorcan Roche Kelly Jul 29
Replying to @TheStalwart
Sorry, I think I missed the start of this. But aren't you missing utility? Like, yea, sure traditional assets have carry, but they also are useful - even if just for bragging.
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Raoul Pal Jul 29
Replying to @TheStalwart
Also, people accept negative carry all the time but when you call it negative rates, it creates a different reaction
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Brian Chappatta Jul 29
Replying to @TheStalwart
Do you think it's just coincidence that negative *nominal* yields started to appear after central banks lowered rates below zero? It's financial engineering... and unclear to what end. I see much more merit in negative *real* yields being the steady state of things.
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Joe Weisenthal Jul 29
Replying to @RaoulGMI
Bingo. I think a core aspect of my view is that the two are more conceptually similar than people realize.
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Joe Weisenthal Jul 29
Replying to @BChappatta
It's definitely not coincidence, but which follows which? Seems just as plausible to me that central banks have been "forced" by market conditions to keep lowering rates. After all, we know that individual central bankers would like to see higher rates all else equal.
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Joe Weisenthal Jul 29
Replying to @LorcanRK
Right, but there are diminishing returns on the bragging.
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David Armstrong Jul 29
Replying to @TheStalwart
I get your point and largely agree. But isn't the value prop of wealth mgmt industry that they protect (i.e. tax minimize) and enhance your wealth, not simply store it for you in a ledger.
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Joe Weisenthal Jul 29
Replying to @djamesarmstrong
Right, but you have to pay them for that! Wealth protection doesn't come free.
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Joe Weisenthal Jul 29
Replying to @TheStalwart
*Paying 2% annually to a hedge fund manager to preserve your wealth* -- Totally normal, well-functioning capitalism *Paying 0.1% annually to hold risk-free government debt* -- A central banker cabal is ruining the world!
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