The Beginning of the End for Paper Money

The beginning of the end for paper money... The rate hike cycle is over... 'The Federal Reserve has capitulated'... Negative rates could be next... Have you made 100% gains this year?... A special evening with Porter...

Remember this date: June 15, 2016.

Years from now, it may be remembered as the day the wheels officially started to come off the world's paper-money system...

Yesterday, the Federal Reserve decided not to raise interest rates this month.

After May's terrible jobs report, this wasn't a surprise. But the rest of its announcement caught the market off-guard...

First, the Fed lowered its expectations for economic growth over the next couple of years. As the Wall Street Journal reported...

Fed officials see the economy growing more slowly this year and next than in their March projection. The new estimates show Fed officials' median expectation for economic growth in 2016 is 2.0%, down from the 2.2% forecast in the March release.

For 2017, the median expected growth rate fell slightly to 2.0% compared to March's 2.1%. In the longer run, Fed officials still see the economy's growth rate at 2.0%.

Said another way, the Fed sees the U.S. economy growing at just 2% as far out as it can see today.

More important, the Fed also slashed its forecast for interest rates. It now expects that long-term interest rates past 2018 will be just 3%. That's down from expectations of 3.25% in March and 4% a few years ago.

These changes may not sound particularly large, but they're important...

Yesterday's message was a dramatic shift from the message just a few weeks ago – prior to the latest jobs report – when several Fed officials suggested a rate increase could be coming as early as this month.

It also represents a rare admission that the Federal Reserve's policies have not worked as intended... and even Fed Chair Janet Yellen has no clue when or even if the Fed will be able to raise rates again. More from the Journal...

"I can't specify a timetable," about when rates will next be raised, she said at a press conference following the Fed's two-day policy meeting. "We are quite uncertain about where rates are heading in the longer term."

In other words, yesterday's announcement likely marked the end of the Fed's latest rate-hike "cycle." (Can you even call a single rate hike a cycle?) And it destroyed whatever credibility the Federal Reserve had left.

But that isn't just our opinion...

CNBC's senior economics reporter Steve Liesman agrees...

Liesman has long been known as one of the biggest supporters of the Federal Reserve. But that has been changing recently.

Following the Fed's March meeting, he asked Yellen directly if the Fed was losing credibility. We shared his stunning comments in the March 31 Digest...

Madam Chair, as you know, inflation has gone up the last two months. We had another strong jobs report. The tracking forecasts for GDP have returned to 2%. And yet the Fed stands pat while it's in a process of what it said at launch in December was a process of normalization.

So I have two questions about this. Does the Fed have a credibility problem in the sense that it says it will do one thing under certain conditions, but doesn't end up doing it?

And then, frankly, if the current conditions are not sufficient for the Fed to raise rates, well, what would those conditions ever look like?

Liesman went even further yesterday. He suggested the Fed has all but given up on raising rates again. Via CNBC...

I think the first rate hike cycle is over. What Janet Yellen said in response to my question... is pretty profound. It's as close to the Fed getting to capitulation as I've ever seen, about the efficacy of Fed policy, about the outlook for the economy.

I just want to read [her answer]: "I think all of us are involved in a process of constantly reevaluating where the neutral rate is." Basically they see these headwinds to the economy as becoming part of the new normal. This five-eighths decline to the Fed Funds rate outlook for 2018 is pretty profound and GDP remained the same.

That's very important... the markets won. The Fed has completely capitulated to the market's point of view. The Fed is not leading the markets here, the markets are leading the Fed. Every single time.

"Bond God" Jeffrey Gundlach also thinks the Fed is done. In a phone interview with news service Reuters yesterday, he said, "the rate-hike cycle has left the building"...

They are not preparing the markets for a rate hike at all. What I think is that the Fed doesn't believe its own [forecasts] anymore. Yellen sounds like she doesn't have confidence... She is backing away from any forecast. She is simply saying, "I really don't want to forecast anymore. We are done with this forecasting game." The subtext is that "we've been so wrong forecasting the data, we should stop."

Following the Fed's decision, the S&P 500 Index fell for the fifth straight day. The U.S. 10-year Treasury yield fell below 1.6%.

But precious metals rallied. Gold shot toward $1,300 an ounce, closing at its highest level since early May. Gold stocks – as measured by the VanEck Vectors Gold Miners Fund (GDX) – surged nearly 4% for the day.

Regular Digest readers know we've been predicting this scenario for months.

We knew the Fed would eventually have no choice but to call off additional rate increases. (Though we must admit, even we didn't think it would happen this quickly.)

But we don't think the Fed will stop there...

Sooner or later, the Fed will begin to cut rates again... and it's only a matter of time before the U.S. adopts negative interest rates, too.

Why is that? Porter explained following a dinner with one of the world's most powerful men this spring. From the April 1 Digest...

According to our host, among U.S. policymakers it was becoming a foregone conclusion that since Europe (one of our major trading partners) and Japan were both using negative interest rates to weaken their currencies and to avoid deflation, that it was only a matter of time before the U.S. would do the same...

If all of the world's major reserve currencies begin paying negative interest rates, the Federal Reserve will have to follow. Otherwise, the dollar would soar and crash our economy.

Seen this way, yesterday's announcement wasn't a surprise...

It's exactly what you would expect from a central bank that is watching other major economies pay negative interest rates... and is now planning to join them.

No one knows exactly what happens next... We're living through the largest monetary experiment in history. But the "endgame" is clear. More from that Digest...

If all the major banks in the world are charging negative interest rates... where will the trillions and trillions of dollars in overnight banking deposits flee to next? Where would you put your money if Bank of America and Wells Fargo began taxing your wealth and your savings every day, instead of paying you interest? How would you keep your money safe?

Think about what that means for a little while... and see if you don't find yourself more than a little worried. [Negative interest rate policy] could trigger a massive, global "run on the bank" as everyone begins trying to hoard currency and gold to avoid the penalties being charged by the central banks for using paper money.

Trust me when I tell you... Policymakers in the U.S. are cognizant of this risk. This isn't a doomsday scenario... It's happening right now. These risks are exactly why gold has seen its biggest quarterly move higher in more than 30 years. The run has started.

We can't say if the run on paper money will build slowly... or reach a crescendo overnight.

But gold is virtually guaranteed to go much, much higher either way... and certain precious metals stocks will soar 10, 20, or 50 times more.

Despite the historic rally this year, the biggest gains are still ahead. There will be pullbacks and corrections along the way, but this trend is just getting started.

If you're still on the sidelines, you could be making a huge mistake.

There has never been a more important time to protect your wealth... or a bigger opportunity to make life-changing profits.

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We'll end today with a quick heads up...

Next week, Porter will be hosting a free online event unlike any other in our company's history.

In short, he'll be sitting down with his longtime friend and mentor Bill Bonner and Bill's legendary analyst Chris Mayer for an uncensored discussion about some of the most popular and important topics in the investment world right now.

They'll discuss the latest on the spread of negative interest rates... what the upcoming "Brexit" vote means for the global economy... how this fall's presidential election could affect your money... and more.

They'll also discuss Chris' remarkable investment track record – his strategy beat the book value of Warren Buffett's Berkshire Hathaway by nearly 2-to-1 over a 10-year period, including the 2008 financial crisis – and why Bill has agreed to invest $5 million of his family's trust money in Chris' new service.

This online event will start promptly at 8 p.m. Eastern time on Tuesday, June 21. It's completely free to attend and comes with absolutely no obligation.

You can add your name to our RSVP list right here. We'll send you a confirmation e-mail with all the details on Tuesday's event.

New 52-week highs (as of 6/15/16): Central Fund of Canada (CEF), VanEck Vectors Junior Gold Miners Fund (GDXJ), SPDR Gold Shares Trust (GLD), Newmont Mining (NEM), NovaGold Resources (NG), Pretium Resources (PVG), SEMAFO (SMF.TO), Silver Standard Resources (SSRI), Vanguard Inflation-Protected Securities Fund (VIPSX), PIMCO 25+ Year Zero Coupon U.S. Treasury Index Fund (ZROZ).

In today's mailbag, several U.K. subscribers weigh in on next week's "Brexit" vote. Send your notes to feedback@stansberryresearch.com.

"You asked for some feedback from your UK readers regarding their stance on the Brexit vote next week. My current inclination is to vote to leave the EU. If I had to pick a single reason it would be that the organisation has become too big – incorporating too many very different countries with conflicting priorities and centralising too many decisions in a single forum that would be better tackled separately and more locally.

"Size inevitably breeds the bureaucracy and waste (it's inconceivable that any single country would have chosen a system which alternates its centre of operation from one month to another). Most critically, it has made the EU reactive rather than proactive, and ill-equipped to take difficult decisions when they are needed – look no further than the years of flailing around over Greece and the chaos of the on-going refugee crises. Also, the evidence that the EU is builder of good relations between member countries is mixed at best, and currently plenty of examples of countries falling out and going their own way on individual issues.

"But I would like to draw a distinction here between 'Europe' and the 'EU'. I love Europe – the continent, the food, the sunshine, the culture, and chose to spend several years living in France. I welcome free trade, co-operation and exchange with Europe at every level. The EU, on the other hand, has become a costly, indecisive, undemocratic leviathan. It now has more than 3 times the number of country members that it had when the UK joined as the 9th member in 1973.

"Moreover, the EU's area of governance has morphed and expanded (with scant little democratic endorsement) from the trade focused organisation it was when we signed up (and where I think its focus should have remained) – into an institution with a say in everything from human rights law and agriculture to border control and the social chapter. It seems to me that there is consensus among the 'Ins' and 'Outs' on many of the EUs flaws: the democratic deficit making it unaccountable and distant from voters, its chronic indecisiveness and reactive stance, and the EU leadership's declared objective of ever-closer union.

"The main difference is that the 'Ins' believe we should reform the EU from within rather than take the risk of leaving. They believe that trade would be disrupted, jobs lost, financial services damaged and that it could prompt Scotland to split from the UK. The 'Outs', on the other hand, see reform as impossible within the current structure. They believe the risks of leaving are overstated: Brexit might cause some disruption, but that will soon be overcome, and will pale in comparison to the potential benefits.

"I believe that the 'status quo' is not an option – the choice is we get closer or we get out – and I doubt the EU's capacity for reform, without it being forced to by an external shock. I don't expect anyone to thank the UK if it votes to leave, but it may just be the catalyst the EU to force a rethink and restructure along more effective and sustainable lines. However, whatever the outcome, I welcome the debate that the referendum has prompted – even if somewhat frustrated and distressed by the poor quality of the debate being articulated and the tactics being used by the spokespeople for both sides.

"I would also like to use this opportunity to say what a fan I am of Stansberry Research, and how lost I would be without their on-going input. Despite the fact that I had two decades of experience as an investment professional when I first came across the company in 2008, I have learned an enormous amount as a result of my Alliance subscription, and am an infinitely better investor as a result. What is more, I am confident that this process of education will continue in the future. Thank you to all and please do keep up the invaluable work." – Paid-up subscriber Catherine M.

"It's interesting to read your perspectives on next week's referendum as to whether we (here in Britain) will remain in or leave the EU. Sadly, for most people, the vote is nothing but confusing as both sides of the debate have run campaigns driven by forecasts based on unfounded rhetoric and fear in an attempt to sway voters where facts are few and far between. We've been subjected to prophesies of 'Armageddon,' 'the end of civilisation,' and comparisons of the EU with the Nazis over the last few weeks.

"Some demographic statistics here point to the majority of 18-24 year olds wanting to remain whilst the majority of over 65s want to leave. Interestingly though, the propensity to actually vote and put pen to ballot paper is much higher in the over 65s than it is in the younger generation so we could have a situation where one side wins the vote despite a large proportion of the population not agreeing with the result.

"For me personally, I'm in the leave camp, predominantly because the EU's vision of 'ever closer union' is not what we signed up for in 1973 when we entered the single market. Now we find ourselves in a political organisation of unelected bureaucrats making inefficient decisions, which are often compromised to appease 27 different nations. Not surprising given the immense diversity of the countries involved, from the UK in the north to Greece in the south, from Spain in the west to the ex-communist states in the east and not to mention the divisive prospect of Turkey potentially joining in the near future.

"However, despite the polls and the bookmakers all indicating a narrow lead for Leave, and The Sun newspaper (aka Mr Murdoch) supporting the Leave campaign, I wouldn't be surprised if the Remain vote wins through, and not for the reason that Steve gives in today's DailyWealth.

"Steve is right though that 'Brexit... is a big deal.' This is such a HUGE decision for the country I do think that the human trait to be fearful of change will make it very difficult for many voters to actually vote for Leave next Thursday, particularly when it's not clear what that change will look like in 1, 2 or 5 years' time. This was a big factor in the Scottish Referendum of 2014 as a vote for independence was to some extent a journey into the unknown. Similarly here, a vote to leave would be a vote of faith that we can stand on our own in the wider world. Either way, I'm sure it's not Armageddon!

"On a separate note, I'd love to be in touch with other UK subscribers of Stansberry Research to learn how they get over some of the issues in following the recommendations, particularly in bonds and options, by being based over here in the UK. Understandably the target audience is for US subscribers but I feel I could probably make more of my subscription if I knew how to get over some local specific hurdles. Is this something the team at Stansberry could help with? To everyone at Stansberry, keep up the great work!" – Paid-up subscriber Anthony K.

"Sitting in London and talking to my colleagues in the City [London's financial district], the facts are not plain. There is so much scaremongering and emotional rhetoric from the politicians that (intelligent) people do not have any idea what to do. There is no fact sheet to be found anywhere. The fact that the ruling party has two key, high-powered political figures on both sides of the fence just makes it worse (Cameron for Stay and Boris for Leave). Even I keep swinging one way then the other – tough call. It could go either way for me." – Paid-up subscriber John R.

Regards,

Justin Brill
Baltimore, Maryland
June 16, 2016