Maybe negative yields are a sign of prosperity

That is the counterintuitive take from my latest Bloomberg column.  Here is one part of the argument:

Perhaps the most overlooked point is that the supply of negative-yielding securities is not so large relative to total global wealth. A recent Credit Suisse estimate suggested that global wealth could reach $369 trillion by 2019, reflecting growth rates of perhaps 7 percent a year. Such numbers are typically inexact, because who can measure the value of all the land in China and the buildings in Uzbekistan? Nonetheless, this number is truly large and it has been growing rapidly. By comparison, the negative-yield securities seem like not such a big deal.

Maybe it’s time we started thinking of negative securities as the equivalent of fire or earthquake insurance for that wealth. If there is truly $300 trillion in global wealth, is it so crazy to think that investors would pay a premium to buy $10 trillion dollars’ worth of insurance?

Keep in mind that if you buy securities at a yield of negative 1 percent a year, and equities are yielding 4 percent on average, your insurance cost on the safer securities is roughly 5 percent of the upfront investment.  So on $10 trillion of safe securities, that is an insurance premium of roughly $500 billion — a relatively small chunk of the $300 or $400 trillion of total global wealth.  In percentage terms it is cheaper than the homeowner’s insurance many of us pay for every day.

Observers sometimes wonder why there are so many negative yields at a time when volatility indices are not always so high. But the key to the risk-protection insight is not that the world is more volatile, which may or may not be the case at a given point in time, but rather that the quantity of otherwise hard-to-insure global wealth is significantly higher than in times past. It is worth noting that in both China and India, standard insurance remains an underdeveloped sector.

Do read the whole thing.


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