Money in a sock drawer

A friend of mine sent me a link to a CBC story about CIBC selling negative-rate bonds for the first time in Canadian history. Negative-rate bonds means they are guaranteed to lose money, and people are buying a lot of them – CIBC raised almost $1.8 billion. Crazy, eh?

Here’s how a negative-rate bond works. When you buy a bond, you’re basically loaning money to the business or government, and they promise to pay you the full value at a certain time in the future. To make you more interested in giving them your money, they give you interest payments along the way. Really, it’s a big IOU and you’re the loan shark.

When the bond has a negative rate, you’re giving say $100 to the business/government and they promise to pay you $95 back. Why would you do it? Because you think the world is going to hell in a hurry and this may be your best bet. At least you’ll have $95.

Like the loan shark you are, if you’re not paid back in time you can take the assets they put up as collateral, they can raise cash by charging their customers more or they can call in their own debts to help them pay you back (after you break their knees, of course). What assets do Canadian banks have? Mortgages. Ah, the plot thickens!

Canadian banks are strong and strongly regulated. The government wouldn’t let them get into the pissing contest between the US and the UK when those countries were deregulating themselves into a tizzy trying to create new ways of making money that eventually led to the 2008 economic collapse. So we trust our banks. When you’re scared, you turn to people and institutions you trust.

That’s why people are handing money over knowing they’ll get less back in the future. They’re scared.

Emotions are running high right now. Here in Canada business investment is slow and the Fort McMurray wildfires took a chunk out of our economic growth when oil production stopped, according to the Conference Board of Canada. Horrible things are happening all over (another attack in France; failed coup in Turkey; race relations in the US; the UK second-guessing its Brexit vote). C’mon, Donald Trump is a presidential candidate fer cryin’ out loud.

Fear, greed and hope. That’s what runs the economy.

My friend wants to keep his money tucked away in his sock drawer. Can’t say I blame him. (Of course there’s inflation, but that’s a post for another day.)

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Perspective from Fort McMurray fire

This week I intended to write about starting the Canadian Securities Course, but I’ve been distracted by the disaster happening in Fort McMurray. If you don’t know, it’s a town in Alberta, Canada, that has been completely evacuated because of forest fires.

About 88,000 people have had to leave their homes and belongings behind. Many houses and businesses have been destroyed, although the full extent of the damage is not yet known. A state of emergency has been called and the federal government will match donations made to the Red Cross.

In the tragedy there are stories of goodwill, such as the Syrian refugees who recently came to Canada and now want to help Fort McMurray evacuees. And this story about a bride-to-be whose wedding gown burned but who found a new one when the call went out and people came forward. All over Canada there are stories of people coming together to help.

It will take years for the residents to recover, emotionally and financially. For most Canadians their home is their main investment and largest asset. What do you do when it disappears? What do you do when your source of income, either your own business or place of employment, also disappears? How do you provide for yourself and your loved ones?

Unfortunately, tens of thousands of people in Alberta will find out. Fortunately, stuff is just stuff and can be replaced. What really matters is the people in your life. They’re going to need each other, and the rest of us, to get through this.

You can donate to the Red Cross here: www.redcross.ca