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  • Christian Armbruester

Elephants, Germany and Money for Nothing

Why negative interest rates may be as bad as they seem.

It’s the biggest elephant in the room ever, and it seems everyone has just accepted that it is so. But seriously, negative interest rates – doesn’t that go against everything we know? Don’t worry, we are not going to get into any endless debates about real rates, Japan, or quantitative easing. All I am saying is, I think we can all agree that the whole thing is a bit weird. So, let us look at this more closely and use some real-world examples.

Germany is a really nice country. I quite like the fact that there are no speed limits on the Autobahn, even though I never feel the need to drive any faster. And you have got to admire the productivity, business prowess and gross domestic product of the fourth largest economy in the world. Enough to lend them money, so that the government may take the proceeds to run its affairs and secure the nation’s finances? Sure. Obviously, a debt obligation that is underwritten by one of the highest ranked creditors in the world is very secure, so there would not be a high interest rate on offer. Okay. Lamentably, the world seems to have gone a bit mad, and actually, you would need to pay the German government so that you can lend them money. Hmm.

So, let me get this straight: if I were the German government and got paid to borrow money, well then maybe I would issue €3 trillion in debt. With Euribor trading at about -0.5%, that means we could make €41,095,890 every day or €15 billion every year, for doing absolutely nothing. But that’s not all, we can take the money we just borrowed for free, and invest it. To make our investments as efficient as possible, let’s do it right with proper management, professional transaction reconciliation, institutional quality execution, independent auditors and administrators with full regulatory oversight.

We shall set up a fund in Luxembourg, structured as a SICAV RAIF, authorised, regulated and operating under the AIFM directive. This will cost about €150,000 for set-up and another €250,000 per year to run. So that means we have 2,999,999,600,000 left to invest into a balanced portfolio of global equities, bonds, loans, commodities, properties and alternative investment strategies, including private equity, structured lending, arbitrage, trend-following and opportunistic strategies, such as venture capital or even crypto currencies. In short: anything other than something that is guaranteed to have a negative return.

I reckon such an investment strategy would yield at least 6% net of all fees, based upon performance from decades of historical data. That means we would make a further €179,999,976,000 on top of the €15,000,000,000 we already received for putting on the strategy in the first place, and we could do that every year. Why isn’t everybody doing this? Maybe they already are, but then again, I am seeing elephants and can’t seem to find an exit to what appears to be a rather large porcelain shop.


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