Innovation, ZIRP 'n' NIRP style

June 14, 2016

The usual Monday water cooler chat about the weekend revealed an interesting quote one of my colleagues heard.

She was at a design conference and was struck to hear the teacher/facilitator remark that the market is going to tank sometime this year so it’s a bad time to join a design consulting firm.

I understand the audience had been mostly students and I am sure that was not at all what they wanted to hear. Frankly, it is not what we want to hear as professionals either. Work drying up…layoffs… contracting budgets and external expenditures are often some of the first cuts made. It all flashes through your mind when you hear quotes like that. However, I woke up the other morning thinking that while in normal economic conditions that prediction might be right, in a world of ZIRP ’n’ NIRP the exact opposite might be the case for new product development/creative consulting firms and their clients who are focused on innovation.

For those not familiar with the acronyms ZIRP and NIRP or latest global central bank movements, ZIRP (Zero Interest Rate Policy) and NIRP (Negative Interest Rate Policy) have been adopted by the European Central Bank and central banks in Japan, Sweden, Denmark and Switzerland. Simply put, some of the safest investments traditionally, like government bonds, now have a negative rate, meaning that instead of the government paying you a rental fee for getting to use your money, you now have to pay the government for the safety of that investment. 

Bear with me for a quick, oversimplified version of what used to be true. Traditional personal investing operated on a basic formula that could be followed throughout one’s professional career to grow wealth and save for retirement. Simply, steps included make money, divert a portion into savings, amass a nest egg, retire and subsequently live off your nest egg.

In a downturn, people are fearful. They turn to defense mode where they try to avoid spending and look for safe havens for their investments. With these new economic policies, we are punishing savers in order to stimulate spending and, thus, the economy. So if you have savings, what are your options today? In particular, what are you options if you need to produce a cash flow with those savings?

  • Put it in the bank at a paltry .01 percent and you’ll lose a bunch to inflation. Or play the opening account bonus chasing game and make 2.5 percent every 90 days if you can stand to move your money that often, reestablish all of your direct deposits and bill pay settings, and can keep finding willing institutions.
  • Leave it in cash and, again, lose it to inflation. Plus, we’re not programmed to just sit on cash. Interestingly, the Japanese are buying safes to do just that. Seriously.
  • Bonds, as we discussed, could cost you a fee, in addition to the drag of inflation. Currently, $6 trillion in bonds are in negative rates and upwards of 500 million people live in developed counties with a currency offering negative rates.
  • Governments might even consider making cash illegal or getting rid of high-denomination notes. The latter is more targeted at limiting crime and corruption, but it sure would make NIRP work better if hording cash was made impractical by small bills!
  • Venture Capital, Private Equity, and Angel Investing are often at a scale beyond most individual investors. If it is at a smaller scale, it could be of such risk that it qualifies as a too-good-to-be-true opportunity. For either individual or institutional investors, the profile of venture funding is far too risky to fill “safety” portions of funds/portfolios.
  • Lastly, you can deploy capital in equities, the very thing that was the more volatile, early-career wealth generation vehicle but was not appropriate for closer-to-retirement “safety” in the first place.
Equities that will be popular will have full R&D pipelines, a commitment to innovation and new products, and a focus on consistently delivering consumer-driven design.

So what does this all have to do with the quote about it being a bad time to go work for design consultancies? In normal economic conditions, where a downturn meant possibly years of clawing back gains, slow sales, tightened access to capital for our bigger clients, and little or no prospects of take-off for our smaller and startup clients, I might have agreed.

Do equities suddenly become attractive? More specifically, do the dividend-paying stocks with consistent yields and established history of growth become the destination for idle cash looking for the safest possible positive-yielding haven?

In a ZIRP ’n’ NIRP world, I have a hunch that after the immediate market downturn that free cash looking for relative safety yet a positively-yielding home will boomerang right back to equities. In particular, those equities that will be popular choices will be the ones with full R&D pipelines, a commitment to innovation and new products, and a focus on consistently delivering consumer-driven design.

Innovation firms are diverse by nature, serving clients in a multitude of industries. That diversity helps spread any industry-related risk to begin with. But we are not immune to the economy. Will we suffer with a downturn in the market? We might. But I suspect that as money flees from risk at a turn in the economy it will also avoid those NIRP-treasuries and head to the safer havens that also provide a positive yield. That means equities, specifically dividend-paying equities. That right there is a vote of confidence for companies with a longer view to their strategy, consumer-centricity, a commitment to investments in new products, and an established history of consistent growth and innovation ... in other words, our clients.

— Written by Dan Sarbacker