Today's article builds on the idea of one of our writers, Martin Ferera, who sent me a quote from (Jim) Grant's Interest Rate Observer. Grant wrote:

“Globally, the stock of negative-yielding debt crossed a record $13 billion on Thursday according to Bloomberg. This represents 26% of global sovereign debt supply and 15.3% of nominal worldwide gross domestic product for 2018. Stateside the 10-yr Treasury remains below 2%, down from 3.25% in November.”

Martin wrote: “This is truly awesome. Even Portuguese Government Debt is negative. The one silver lining is that it is the European Central Bank that is holding these so if there's a shock, the ECB will not be a panic seller.”

Negative yields on government debt comes because lenders expect that interest rates will be lowered some more by the ECB and the US Fed because of slowing growth. For people the age of Martin, Jim Grant, and me, this reaction is not so much awesome as scary, because it is unusual for lenders to accept that the money they will get back for a loan is lower than the amount they are lending. It started with the Swiss who in the 1970s decided to impost a negative interest rates on the Swiss franc to stop inflows of capital which would raise the valuation of the currency. This in the end would hurt Swiss exports. However the NIRP didn't stop foreigners buying Swiss franc-denominated bonds, because they still got to avoid taxes from their home countries.

Negative interest rate policy, NIRP, is a way of taxing money in theory to make you spend it. During the global financial crisis a decade ago the idea became very popular. However the cheap money was not made available to money market funds which meant that sometimes they “broke the buck” with negative returns, which led to their customers walking out and leaving at least one fund bankrupt.

Then Japan decided that it would try NIRP try boost growth. So at the start of 2016 the Bank of Japan introduced negative interest rates as a form of stimulus. If you didn't have to pay back all you had borrowed you do more borrowing, spending, and investing—even with a bit of inflation thrown in. The trouble is that it didn't work in Japan either. Government debt rose to be 2 ½ times gross domestic growth last year.

Sweden's Riksbank (its Central Bank) wanted to keep out euro-land inflows by cutting interest rates. They succeeded during the global financial crisis but in recent years the result was to effectively cut rates to below 0. The showed that negative interest rates produce diminishing returns for example in their impact on Swedish mortgage rates after ZIRP arrived in 2015. The policy rate had gone negative but Swedish mortgages and corporate debt did not drop below 0. Instead of issuing el cheapo bonds, the Swedish banks increased their fees and rely moreon deposits to finance lending, not using the CB window. (The Swedish experience to the start of this year was studied by Gauti Eggertsson with Harvard star economist Lawrence Summers and published by VOX CEPR Policy Portal.)

NIRP was tried also by the ECB on bank deposits with the central bank. This made it easier for governments to spend money but cannot improve the economy overall. NIRP cannot create appealing business investment or make borrowers any more creditworthy. The ultimate result in Japan was to make the state one of the top 10 shareholders in 90% of listed Nikkei 225 stocks, not a good outcome.

This year, despite the Swedish experience, Denmark began another 2 year NIRP program to run until 2021—in the hope of pushing down the krone or stopped it appreciating. It was after the Swiss decided to let their franc float in late 2015 that the Danes began trying to stop inflows into krone. Their CB started to buy krone on the cheap to stop it appreciating against the euro currency of neighboring countries. It intervenes to stop a rise of as little as 0.1% in the exchange rate by lowering the repo rate it pays for bank deposits with the CB—to discourage them.

In theory holding your own cash is not a good idea. You can be robbed or have to pay for a safe deposit box. This is one reason why interest rates can fall to under 0% because of inertia and the risks of walking around with $100 bills in your wallet. One idea now making the rounds of the International Monetary Fund is to allow the interest rate on cash to be below that for “electronic” money. So stores and borrowers might offer lower prices for “e-money” and higher ones for cash. There are dual currency price precedents in border country shops and even gas stations, the IMF experts Ruchir Agarwal and Singe Krogstrup argue in IMFBlog.

While not an expert in central banking I think that the evidence seems to point to ZIRP as a mistaken bit of through-the-looking-glass policy. One reason we are seeing so much interest in cyber-currency is that people are more willing to risk their money if they cannot be sure they will get a return on it. I also think some of the rise in inequality that economists like Thomas Pikety in France and our own homegrown Elizabeth Warren are warning about is also the result of misplaced reliance on ZIRP to get economies up and running again.

While corporate borrowing is never at ZIRP (because you don't lend to a company without the chance of some interest) our recent issues for paid subscribers have highlighted a very large increase in the issuance of new long-term debt instruments by the companies whose stock we own. This is an indication that they don't expect the Fed to lower rates despite Pres. Trumpet's call for his appointee Fed Chairman Jerome Powell to cut interest rates some more—or risk being fired.

Today's news is from South Africa (lots), Russia, Armenida, Azerbaijan, Belarus, Georgia, Kazakhstan, Hong Kong, Japan, Britain, Finland, Saudi Arabia, China, Canada, Colombia, Sweden, Israel, Nevada, Puerto Rico, The US Virgin Islands, Australia, The Netherlands Antilles, Spain, and Mexico.

Tech & Tel

*Naspers (NPSNY) reported to the Johannesburg Stock Exchange that MIH Holdings Share Trust (of which it owns 70%) has bought 10,700 more N shares for its pension plan. Its share rose 0.3%.

*Russia's Google, called Yandex, wants to list its Taxi sub with an ipo but it is unclear where the deal will be done. YNDX is on Q but the US is less friendly than it was. Its Taxi sub was created with Uber to cover Russia and neighboring countries Armenia, Azerbaijan, Belarus, Georgia, and Kazakhstan. We own Yandex through NPSNY which also owns Avito classified ads and a chunk of Mail.ru.

*Hong Kong is skeptical about a US-China trade truce despite misleading headlines. Tencent Holdings lost 3.84% there today, TCEHY.

*Japanese Nintendo game-maker gained 3.3% today. NTDOY.

*Vodacom, the listed South African sub of Vodafone of Britain, was downgraded from neutral to underweight by JP Morgan-Chase analysts. VOD is selling assets of Vodacom in several major African markets. Vodafone has issued $1.75 bn of June 2049 4.875% notes and $500 mn of June 2059 5.125% notes. VOD is up 2.1% today but down a lot this past year.

*Finnish Nokia has signed up Zain, the Saudi Arabian telco, for some 5G deployment over the next 3 years but mostly lower band. It is NOK's 100^th customer sign-up for 5G.

*A Bloomberg News article shows that Huawei was not only founded by a People's Liberation Army engineer, Ren Zhengfei, but that research papers Huawei staffers published in the last decade show that they worked with PLA researchers and scholars at China's military university. The research was into software security and reliability, artificial intelligence and radio communication with the Central Military Commission, the government information security program, the National University of Defense Technology. This despite Ren's denials. He also denied that Huawei got government subsidizes back in Feb. on the BBC but in fact research grants topped sever hundred million dollars from Beijing. This adds further uncertainty to US stocks like Micron which work with Huawei under the table. Pres Xi Jinping reportedly wants the US ban on Huawei lifted as part of a trade truce. According to its chief legal officer, Song Liuping, Huawei will be fair to companies like Verizon in allowing them to use its patents but wants to collect $1 bn for its intellectual property all the same.

Industrials and Extraction

*Investors Intelligence chartists in London rate Johnson Matthey as a buy at GBX 3244 after it formed a short term price and relative base. JMAT in London, JMPLY here. JMPLY is down 1.9% on the news.

*An oil stock tip came for BP today by Kepler Capital Markets, a buy rating with a GBX 680 target price vs 533 now. The ADR equals 6 UK shares. BP Ventures today said it had invested $30 mn in Calysta Inc, a biotech in Calfifornia which will use natural gas fermentation to produce protein feed for fish, livestock, and pet food. Its FeedKind protein will meet demand for food and help prevent overfishing.

Separately, BP was the first sign-up for the Woodfibre liquified natural gas project in Canada and will buy 750,000 metric tonnes of LNG by 2023 when the project starts up in British Columbia. Our rival Pembina Pipeline (PBA, formerly Veresen) is still awaiting US permits but like Woodfibre is planning to sell mostly to Asian countries. BP stock has fallen with the price of crude today. PBA lost 0.16%.

*Israeli oil co. Delek Group (DGRLY) gained 0.72% because it supplies energy to Jordan and Egypt, with which some kind of a deal will be made.

*Yesterday Mario Gabelli rated Schlumberger Ltd (SLB) a buy with a $55 target price.SLB rose some more today, hitting $29.3 today but still 50 cents below its high yesterday morning.

*Israeli-owned Nevada stock Ormat Technologies (ORA), which develops geothermal energy extraction and storage globally, has finally gone into the black for us, after a disastrous volcanic eruption in Hawaii.

*More software problems not related to the MCAS flight control system with Boeing's 737-Max were found by federal regulators yesterday, meaning there will be more need for training by our Canadian CAE's simulators. CAE is up 1%+ on the NYSE.

*A Royal Bank of Canada analyst cut Cameco's target price to C$15 from 16 and rates it sector perform. CCJ mines uranium and its stock price lost 0.9%.

*Colombian Tecnoglass Inc, TGLS, rose 1.5% today.

*Veoneer of Sweden is now covered by Crédit Suisse which rates VNE neutral with a $18 target price..

Pharmaceuticals

*Teva (TEVA) gained 2.53% and is back over $9 today. It lost a bit but is now $9.0799/sh.

*Benitec Biopharma (BNTC) gained 7.11% in Australian trading. It rose 1.36% here on low volume. However its unlisted warrants dropped 75%. I am mystified. Its options issued last year at $1.25-1.50 have lapsed and employees are getting new ones. Our trade warrants run to August 14, 2020 and were issued with stock. The new replacement warrants issued to employees are ranked pari passu with traded options, and this may be the killer reason for the drop. The trouble with Australia is that they use English and Latin but not the way we do.

*GlaxoSmithKline will develop 3 more PRINT inhalation therapeutics from Liquida which will have to pay milestones starting at phase III of GSK trials. PRINT is a particle engineering platform which allows the size, shape, and chemical composition of very uniform drug particles to be precisely controlled. LQDA-Q is a North Carolina research triangle start-up.

Banks and Insurers

*Bank of Nova Scotia will sell its operations in Puerto Rico and the U.S. Virgin Islands to Oriental Bank, a sub of OFG Bankcorp for $560 mn US in after-tax gains but will produce a loss of $400 mn next quarter from writing off goodwill. This is a marginal business for Scotiabank.

BNS is issuing C$1.5 bn in 2.83% subordinated debentures based on a shelf registration last year. The bond will be sold July 3 and run for 5 years. It can be extended by Scotiabank paying the 3-mo banker's acceptance rate plus 1.18% to 2029. This is an example of the rush to raise money noted above.

*Hong Kongers finally figured out that AIA Group is not a China-linked company but a pan Asia one and the stock rose 1.92%. AAGIY.

*Banco Santander, whose fund-raising and Mexican exit I have covered for a few days, today gained 0.65%. It is another biggie raising money despite the theory that rates will fall lower.

Funds

*Eaton Vance Tax Managed Global Diversified Income Fund (EXG). as of April 30 was 59.2% invested in US shares and 10.4% in Britain. It is therefore a sell for our fund portfolio, as it is not well diversified. Sell at $8.15.

*US insurer fund manager John Hancock has dropped Aberdeen Standard Life as the manager of its JHAIS global absolute return strategies fund panel which will cost the Scottish group £700 mn in fees for the $6.16 bn fund. John Hancock, despite its USA name, is owned by Manulife of Canada. We sold SLFPY.

*Note that our Aberdeen Asia-Pacific and Global Income bond funds, FAX and FCO, are up 0.5% and 1.82% today.

*Spider Gold is down today to $132.77/sh, off 0.14%. GLD.

*I bought IAU, iShares Gold Trust ETF yesterday for $13.50/sh. Today they are at $13.47. So my late file of my blog didn't hurt the readership.

*Mexican REIT Fibra Uno crashed 8.42% in Us trading today and we are down a third. No FBASF news.

*Among the raisers of money this week was Canadian General Investments, a closed-end fund, which entered a C$100 mn credit facility with a Canadian bank. CGI there, CGRIF here, uses leverage to boost its performance for shareholders, starting with preferred shares but now also including debt. It is always traded at a huge discount from net asset value because of Canadian caution on funds.