So there I was. Alone in my HMMWV (Humvee), reading Study Session 7 in the CFA level 3 curriculum and I started laughing out loud. It is not often that I laugh at something I read in the CFA curriculum. It is generally very serious and often technical in nature. However, Study Session 7, Economic Analysis, has a produced a few gems for my enjoyment.
The first nugget is pictured above. It is talking about central banks and what they can (or can’t) do to stimulate or slow an economy. The comedic moment began when I read that, “official interest rate targets cannot drop below zero”. Yea, maybe a few years ago that was true, but not anymore. Several central banks are going beyond ZIRP (zero interest rate policy) and are now in the world of NIRP (negative interest rate policy).
It is always dangerous to speak in absolutes. It is far more prudent to say something like, “while theoretically possible, negative interest rates are extremely rare and unlikely to occur.” I am not sure what cosmic force the authors believed were holding interest rates from going below zero. My guess is that the status quo bias played a role. Just because you have never seen something does not mean that it will not happen.
Black swan anyone?
What happens when there are negative interest rates? Here is a nice story about a Danish family who is getting paid interest on their mortgage. Yes, instead of paying interest on their mortgage, they are getting paid for having a mortgage. Bizarro World stuff right there. This sounds great, except there is a downside to NIRP; if they had a savings account they would be paying the bank for the privilege of holding cash. Cash in a bank account dies a slow painful death. I don’t know much about Danish mortgages, but if this is anything like a typical American 30-year fixed rate mortgage, this is profound.
I have a feeling the CFA Institute will be updating this reading at some point in the near future. In their defense, they do mention in a footnote that the United States occasionally had negative nominal yields between 1938 to 1941. I like how they throw the “nominal” in there because that time period was the Great Depression and the negative nominal yield was likely a positive real yield because prices then were dropping like barrels of shale oil today.
The other moment of levity came in Example 1 of Reading 16, Equity Market Valuation. The question explains that the divorce rate and formation of single-parent households in a country are increasing rapidly. Then it asks what the impact on the economy will be?
To my surprise, it is mostly all good news for the overall economy. Labor force participation rates rise. Incomes rise and overall production is increased. Apparently, the only downside is that per-household income decreases. Actually, the authors who wrote this claimed per-household income “will grow at a below-trend rate (and may even decline)”. So, even household income may still grow. Nothing but good news if the divorce rates shoot up. Everyone comes out smelling of roses.
What kind of insidious ploy for economic growth is this? I can just imagine someone in Congress pushing their Divorce Encouragement and Economic Growth Act through the legislature in order to stimulate the economy and improve the lives of their constituents. I don’t have time to fully debunk this, but I have a suspicion that more wealth is squandered in spite via divorce than is ever created from breaking up families. Perhaps for the lawyers, it is a win, but nearly everyone else would be a net loser. It’s just a hunch I have. Strange example.
Thanks for the laughs CFA Institute. They seemed to have helped my retention of the material. Today I scored a 78% in Schweser’s Q-Bank for Study Session 7.
Tomorrow morning I will test myself on Study Session 8, Asset Allocation, with Schweser’s Q-Bank. Off I go.