Breaking Up Is Hard To Do

There are numerous examples of a company splitting into separate companies. Of course, splitting up may not always be the best option. For example, earlier this month, CBS and Viacom announced terms of a a merger deal 13 years after the companies had split. Now, Phillip Morris and Altria are in talks to merge. The companies had split in 2008, but declining tobacco sales, coupled with the diversification of the companies into other areas such as vape pens and cannabis have made a merger seem advantageous.

Starbucks Profit

We are sure that you are familiar with store gift cards and the frustration of have 43 cents left on the card. In retail, gift card balances are known as stored value liabilities. Each year Starbucks recognizes that a portion of its stored value liabilities will be permanently lost. This is known as breakage. Starbucks recognizes this amount as profit. In 2018 the company recognized $155 million in breakage, around 10% of all stored value balances. Wow! Starbucks already pays just 0% on its debts to customers, but add in breakage and that equates to a roughly negative 10% interest rate!

Negative Interest Rates

As we have previously mentioned, worldwide negative yielding debt is at an extraordinary level. In fact, there is $15 trillion of negative yield debt outstanding. While negative yields have generally been relatively short-term, the entire German government bond yield curve is now negative. And while negative yielding government debt has occurred for the last several years, it hasn't reached the consumer market until now. Denmark's Jyske Bank recently announced that home buyers can now take out a 10-year mortgage with an interest rate of -.5 percent. This means that ignoring fees, home buyers will pay less for the house than the purchase price.