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6.19.2019 - Free Investing Newsletter Bookmark

Negative
 
Here’s something you don’t hear about on your 6 pm news. The amount of sovereign debt trading with a negative yield hits an all- time high. Yes folks, negative interest rates.

*FRENCH 10-YEAR BOND YIELD FALLS TO 0% FOR THE FIRST TIME
*SWEDISH 10-YEAR BOND YIELD FALLS TO 0% FOR FIRST TIME
*AUSTRIAN 10-YEAR BOND YIELD FALLS BELOW 0% FOR FIRST TIME
 
Are you seeing a trend here? Good, because whether you want to believe it or not, we’re going to be experiencing negative interest rates here too. It’s simply a matter of time.
 

So, before we get too far into this, just what is a negative interest rate? I’m glad you asked. Let’s look at it.

A negative interest rate policy (NIRP) is an unconventional monetary policy tool employed by a central bank whereby nominal target interest rates are set with a negative value, below the theoretical lower bound of zero percent. A NIRP is a relatively new development (since the 1990s) in monetary policy used to mitigate a financial crisis.
 
A negative interest rate means that the central bank (and perhaps private banks) will charge negative interest. Instead of receiving money on deposits, depositors must pay regularly to keep their money with the bank. This is intended to incentivize banks to lend money more freely and businesses and individuals to invest, lend, and spend money rather than pay a fee to keep it safe.
 
 
Are you following along? Yes folks, negative interest rates are exactly as they sound. YOU will pay the bank, for the privilege of placing your deposits with them. The reason given for these grotesque aberrations, is that when all else fails to spur an economy, when all the policy has failed, they figure that by charging you to use the banking facility, you’d rather go spend your money and boost the economy.
 
This couldn’t be more lunatic if they were smoking drano when they came up with it. In 5000 years of recorded history, there has NEVER been negative interest rates. But now, now in 2019, the results of 100 years of bankster plots, games, gadgets and gizmo’s, we see 12 trillion dollars sitting in accounts, being CHARGED for the privilege.
 
Now to truly grasp how utterly bizarre this entire concept is, consider this. In a normal galaxy, with normal people, you wander down to the bank to get a loan for say, a car. You borrow the money, and because the lender needs to get paid for taking the risk, and tying up his cash for a few years, he charges you an interest rate per year. Let’s just say it’s 5%.
 
So depending on the loan duration, you end up paying back the original loan amount ( say 20 grand) plus the 5% per year on that 20 grand. This has been a standard loan arrangement for 1000 years.
 
But now, with negative interest, you go borrow that 20 grand, and the Bank pays YOU the 5%. Pretty bizarre, no? Yes. Certainly, it drives up the demand for loans, who wouldn’t want what is basically free money?
 
Is that scenario possible? It is, but in more realistic terms, it’s the central banks that charge the regional banks to park their money. The hope is that if the central bank charges the member banks to park money, they’d much rather loan that money to consumers and at least get a little interest in return.
 
In theory, banks would rather lend money to borrowers and earn at least some interest as opposed to being charged to hold their money at a central bank. Additionally, negative rates charged by a central bank may carry over to deposit accounts and loans. This means that deposit holders would also be charged for parking their money at their local bank while some borrowers enjoy the privilege of actually earning money by taking out a loan.
 
As you might imagine, this economic VooDoo is the centerfold depiction of desperation. When all the schemes, all the QE’s, all the lever pulling and button pushing has failed, they resort to this madness.
 
When interest rates drop near zero, the central bank wants the public to take your money out of savings accounts and either spend it or invest it. This is based on the circular flow of income model and the “paradox of thrift.” Negative interest rate policy (NIRP) is a last-ditch attempt to generate spending, investment and modest inflation.
 
The second reason behind adopting low interest rates is much more practical and far less advertised. When national governments are in severe debt, low interest rates make it easier for them to afford interest payments. An ineffective low-rate policy from a central bank often follows years of deficit spending by a central Government.   Do I hear more deficits?? Indeed I do.
 
Is any of this actually working anywhere? Nope. Japan’s a prime example. No country has been proven less effective with low interest rate policies or high national debt than Japan. By the time the BOJ announced its NIRP, the Japanese government's debt was well over 200% of gross domestic product (GDP). (anytime debt reaches 100% of GDP you're considered 3rd world. Ours is now 115%. go figure)
 
Japan's debt woes began in the early 1990s, after Japanese real estate and their stock market bubbles burst and caused a steep recession. Over the next decade, the BOJ cut interest rates from 6% to 0.25%, and the Japanese government tried nine separate fiscal stimulus packages. The BOJ deployed its first quantitative easing in 1997, another round between 2001 and 2004, and quantitative and qualitative monetary easing (QQE) in 2013. Today, the Bank Of Japan owns 70% of their stock market. Despite these efforts, Japan has had almost no economic growth over the past 25 years.
 
So what brings this up? Well obviously the market has been looking for the Feds to cut rates on Wednesday. But I had told you that they won’t do that, they didn’t need to. Why? Because when Mario Draghi came out the other day and said he’d cut rates, and start QE and do anything necessary to keep Europe going, we enjoyed a pop out of that. Add in Trump’s tweet about meeting with President Xi and we had a 350+ point day Tuesday. The Fed’s got a pass and they took it.
 
But it begs the question, what will they do when the real recession kicks in? With only a couple percentage points between where we are now and zero, are they going to actually allow this negative rate gimmick to happen? I think the answer is yes and for several reasons.
 
First off, members of the Fed have been jawboning about how in the last big recession, negative rates could have helped fix things “faster.” This was a letter produced by the San Francisco Fed:

The Federal Reserve dropped the federal funds rate to near zero during the Great Recession to bolster the U.S. economy. Allowing the federal funds rate to drop below zero may have reduced the depth of the recession and enabled the economy to return more quickly to its full potential. It also may have allowed inflation to rise faster toward the Fed’s 2% target. In other words, negative interest rates may be a useful tool to promote the Fed’s dual mandate.
 
With just 200 basis points before hitting 0 on the 10 year, and seeing how Powell has changed the language of the Fed statements regarding the “zero bound” level, it appears to me, that in the depths of the next recession, we’re going to have negative interest rates applied in the US.
 
The first question people usually ask is “won’t everyone just put their money in the mattress?” It’s a great question and logical at “some” level. Yes it would be better to have your cash in a mattress earning nothing, than having to pay to keep it in the bank.
 
Well that’s fine if you’re talking about a few grand. But what do you do if you happen to have 1, 2, 5, or 10 MILLION dollars in a bank? Do you want that in your house? What about thieves, what about fire?
 
People with a lot of money are in a catch 22 situation. They don’t want to pay to keep their money someplace, but don’t/can’t take the risk of physical cash. This will cause people to migrate into crypto cash, and especially gold and silver.
 
While you still have the risk of storage, 100K dollars’ worth of gold coins is just 73 pieces, and you could fit all 73 in a peanut butter jar.
 
The idea of negative interest rates, in what was once the most economically successful nation on earth, is beyond comprehension. But they’re coming. Not today, not tomorrow. But count on it.
 
The Market:
 
So, yesterday we had a 350 point love fest over Mario Draghi going “all in” on stimulus again, and then of course the Trump tweet suggesting that Xi and him were going to have an extended talk at the G20 meeting. Instantly it got everyone’s hopes for a trade deal up, and we had a monster day.

Today was Fed decision day, and as I said, Draghi and Trump had paved the way for the Feds to punt on cutting rates. While they didn’t cut rates, they opened the door to them, with Powell saying he’s aware of the “risks” and ready to move if necessary.
 
So a rate cut in July is baked in the cake, right? NOT so fast. See President Trump is meeting with President Xi at the G20 later this month. There VERY WELL COULD be a deal struck then. Why? China’s getting crushed worse than we are in this tariff mess. Their banking system, already in shambles over so many non- performing loans had to be bailed out again Monday. They NEED a deal. We “want” a deal.
 
If they come to terms the market is going to explode higher. It might not last long and might even turn out to be a “blow off top”. But one thing it would do, is keep the Feds on hold again. They wouldn’t have to cut rates until September at that point.
 
IF however no deal is reached, then yes it’s my guess that they cut rates in July. The market wants rate cuts and Trump wants rate cuts. They’ll deliver them.
 
But the real question is between now and then. The S&P is jut 22 points from new all time highs. Those highs could act as a ceiling, until we see just what does happen at the G20. So, there’s a chance we see the market move up a little more, bang it’s head at the resistance, and fade off. We could see several “head bangs, fade backs” before we finally get through. ( If we get through)
 
With today’s close showing just 38 DOW points, they weren’t “all in” about Powell by any means. So it does lend support to the idea that we stall out here for a while and wait on the G20. One thing is certain however. Rates will be cut this year.
 
Good luck folks, I’ll see you all on Sunday.

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