Time to reassess risks when chasing rewards

By DAVID MOON, Moon Capital Management, LLC
January 15, 2012

The rate on a new six-month CD at both First Tennessee and Regions bank is 0.15 percent. The rate on a six-month Treasury bill is a scant 0.04 percent. Not four percent, but four one-hundredths of a percent. If you invest $10,000 in a six month T-bill, you will earn a whopping two dollars.

That’s still better than Germany, however. The new six-month German bills auctioned a week ago pay an interest rate of negative 0.0122 percent. That’s right. You have to pay the Germans to loan them money. Over six months, a perfectly-hedged dollar denominated investor would lose about 61 cents on a $10,000 (7,825 euro) investment.

Why would someone agree to invest their money at a guaranteed loss, albeit a small one? Because they are more concerned about the return of their money than the return on it.

Investors in German bonds – at least the ones participating in last week’s six-month debt auction – prefer a guaranteed miniscule loss to the prospect of much greater losses in other countries, longer-term bonds or stocks.

It is a flight to European safety. Investors generally shunned European stocks in 2011. German stocks dropped 15 percent. In France they fell 20 percent. Italy was off 27 percent. The average decline across Europe was 15 percent.

Instead of stocks, private investors were buying very short-term Swiss and German bonds.

Rates are almost that low in the US, but the dynamics are much different. Private investors haven’t driven short-term interest rates to zero. The government has. The Federal Reserve has been the largest purchaser of these bonds and has used trillions of borrowed dollars to do it, driving interest rates to near zero. It has also driven private investors into riskier asset classes.

That’s how US stocks could withstand the poor economic news of 2011; the Fed crowded investors out of the government bond market and into traditionally riskier assets.

This is partially symptomatic of why Standard and Poor’s rates the US federal government debt riskier than German debt. German rates are zero because its private sector abhors debt. US rates are zero because our public sector is addicted to it.

Not only does our federal debt continue to explode, consumers are happy to follow suit. After actually reducing consumer debt in 2009 and 2010, individuals borrowed more money in 2011, with November’s consumer debt increasing at a 9.9 percent annual rate.

We may blame the government for forcing an investor flight to risk, but the US consumer has been eager to join the movement. I am fearful of the long-term consequences.


The Pemberton Medicine Company was incorporated on this date in 1889. It later changed its name to something a bit more well-known, and continues to prosper today. If you are the first person to email me with the current name of the company (without looking it up,) I’ll send you a copy of my 2012 page-per-day calendar of original quotes, “Thoughts Are Things for Investors.” You are on the honor system not to cheat.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

Click here to subscribe to MCM commentary.

MCM website