Global corporate power will consolidate with negative rates
I wanted to pass along this thought to my readers. As bond yields continue to fall it will become increasingly difficult to capitalize on a relative basis. Here in the United States, we may think borrowing at 3.6% for a mortgage sounds like a great deal, but in Europe, the largest and best firms are already borrowing at negative rates.
Now, many will say, so what? The EU nation-states already have a ton of negative-yielding debt. But under a regime of negative rates, only the biggest entities (e.g. nations and blue chip corporations) will truly come out ahead. The average person and smaller corporation will always be at a comparative disadvantage and as bond yields fall, the biggest credits will come out on top.
What does this mean? With access to ultra cheap capital, over time, the nation-state governments will naturally exert more control over its people. Moreover, the largest corporations with their low costs of capital will continue to consolidate their power and control over their markets and sectors.
Contemplate a world where the largest corporations can borrow at zero or negative rates. While the nation-states are inefficient spenders and usually have little to show for their borrowings, private investment must make efficient use of their capital. If firms like Nestle can borrow at rates much lower than its competitors, it would be natural to assume that Nestle will oversupply the market and gain market share. Nestle can lower prices and still make money. The list of large firms that borrow at sub-zero rates will continue to grow. Only the leaders in each market sector will benefit on a relative basis.
Control of domestic oil and agriculture will move into tighter hands
If we think we will see calamity in the domestic oil patch, think again. Picture a scenario where firms like Exxon and Chevron can borrow at near-zero rates. They will naturally gain effective control over domestic shale oil production and profit with $40 oil. The other poorly managed and smaller firms will bite the dust. Only the biggest and most powerful will benefit from lower rates. The poorer credits will be left standing as the wealthiest gain more control over the world.
The largest food corporations will eventually take their ultra cheap capital and buy up all the farm land that is currently owned by the over stretched farmers. This will drive commodity prices even lower over time, so these firms can control their input costs. Domestic farmers can no longer compete in a globally-sourced agriculture market and their borrowing costs will remain much higher.
Welcome to the new world order.