This interesting study finds that periods of time with negative real interest rates (when inflation is higher than bond yields) can be considered as a cycle with an early part and a later part. Current estimates have real interest rates somewhere between negative 6% and negative 7%.
When real rates are negative, speculators are paid to borrow money.
**Which Investments Do Best When Real Interest Rates Are Negative?**
**History suggests the assets to buy—and the ones to avoid—according to this professor**
**By Derek Horstmeyer, The Wall Street Journal, May 6, 2022**
**Historical data shows that when real interest rates go negative, the riskiest asset classes (emerging-markets stocks, small-caps, etc.) have done extremely well in the first half of such a cycle—outperforming safer assets by over 1.5 percentage points a month. Yet this reverses in the second half of the cycle: On average, the riskiest assets have underperformed by over a percentage point in the second half of a negative-rate cycle...**
**Everything flipped as the cycles matured. In the second halves, the riskiest funds underperformed. ... As for the present situation, the current negative-rate cycle began in the second quarter of 2020. But, since we are still in the cycle, approaching the beginning of the third year, it’s impossible to know yet where the first half ends and the second begins. ...** [end quote]
The latest is that the fed funds rate is 0.75% and inflation is over 8%. It’s going to take quite a while until bond yields are positive. In the meantime, there’s the small consideration of a possible stock market crash and recession.
Of the sectors that were studied, U.S. large cap and value stocks did better in the second half of the cycle than international, emerging markets and fixed income.