This Is What an 'Upside Down' Economy Looks Like

This is what an 'upside down' economy looks like... Negative interest rates make their mark in Europe... Do we want the same here?... Go for gold... Google wants in on financial services... What about regulation?...

'Give me some of that money. I want some of that money'...

You probably saw the headlines this week citing that quote from President Donald Trump. He made the comments during a speech to the Economic Club of New York on Tuesday.

In short, Trump was arguing that the U.S. is at a "competitive disadvantage" for having higher interest rates than other countries.

"That money" is what other countries are "getting" from their negative interest rate policies ("NIRP") that have been used to encourage spending and stimulate economies.

Regular Digest readers know we've been critical of these policies for years. As our colleague Justin Brill wrote in the August 1 Digest...

Thanks to its widespread adoption by the central banks of Europe and Japan, roughly 25% of all outstanding government debt now trades with a negative yield.

This includes half of all European sovereign debt... 85% of Germany's debt... and as of last week, all of Switzerland's outstanding debt. That's right, the entire Swiss government bond market – ranging from maturities of one month all the way out to 50 years – now trades with a negative yield.

Worse, we're now seeing yields on some European high-yield corporate (or "junk") bonds begin to dip into negative territory. This is complete and utter madness.

Negative interest rates, along with quantitative easing and other central bank stimulus programs, have helped drive up the prices of many financial assets in recent years.

But our concern has been that NIRP would eventually filter down to 'Main Street' customers directly...

As Justin noted in August, the costs of these policies were beginning to do just that in Europe... Swiss bank UBS (UBS) said it would start charging a 0.75% fee on cash balances above $2 million this month.

Since then, two other major Swiss banks, Credit Suisse (CS) and PostFinance, have announced similar policies... Credit Suisse started charging business clients with balances above $2 million a 0.75% fee today, in fact.

And Switzerland, where the central bank has used negative interest rates since 2015, isn't the only country where this is happening...

Denmark's Jyske Bank, one of the country's largest banks, will start charging a 0.60% fee in December for customers with at least $1.1 million deposited. It will be the third Danish bank to introduce negative interest rates. And Italian bank UniCredit said it will do something similar starting in 2020.

In the end, this amounts to an annual tax of sorts on the "super rich" that will come to several thousand dollars.

Ho-hum, you might say. And in theory, such policies would encourage customers to take money out and spend it elsewhere.

But what's most concerning are the reasons these banks have turned to charging people simply to hold their money...

With NIRP in place, and with the European Central Bank continuing cuts into negative territory as recently as September, it's been much harder for banks to make a profit on loans and mortgages...

And these banks are now passing on some of the costs to their wealthiest clients.

It just shows what we've long warned... and what's obvious to folks who think it's a good idea to balance their checkbooks... If you owe money, NIRP might sound fun in the short term, but this "perversion of capitalism" risks destroying the banking system. As Porter wrote in the Digest back on April 1, 2016...

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?

We're seeing it play out in real-time in Europe. Do we want that same 'upside down' economy here in the U.S.?

Federal Reserve Chairman Jerome Powell told Congress on Wednesday that the central bank is not considering employing negative interest rates at the moment.

It "would certainly not be appropriate in the current environment," Powell said.

Well, of course, the Fed's not going to go from a 1.5% to 1.75% benchmark rate range to negative numbers in one giant step. But we're getting closer...

As our colleague and Stansberry NewsWire editor C. Scott Garliss reported earlier today, "Powell expressed concern with persistently low inflation, implying the Fed would lean toward additional rate cuts to boost inflation."

So what should you do if you're concerned about the impact of rock-bottom or negative rates on your money? Longtime Digest readers know we've tracked the charts of negative-yielding debt and gold over the years...

Excuse us while we go look for some gold investments now.

I wonder if those folks with a lot of money in Swiss or Danish banks would consider a move to Google...

As if Alphabet (GOOGL) didn't have enough data on us already, the Google-parent company is talking about a foray into financial services.

This seems to be the trendy "FAANG" thing to do... after Apple's (AAPL) credit-card launch and Facebook's proposed digital currency libra.

Earlier this week, the company that calls itself Alphabet (but everyone knows as Google) said it's talking to U.S. banks about offering checking accounts to its customers through Google Pay. Like its rival Apple Pay, Google Pay can be used for purchases online and in stores.

We can't say we're surprised at the news... This is what Google does. It provides a service... collects data... makes money from the collected data... and repeats the process.

Anyone who is a longtime user of Google's search, e-mail, photos, or maps platforms (or anything else) can probably guess what a Google checking-account service could look like...

An easy-to-use interface that does its job, but also a platform that gradually collects data on what you're spending your money on – and how often – and eventually shows targeted advertising to you...

This is what Google considers an 'Other Bet'...

Our Dr. David "Doc" Eifrig wrote about this idea when he first recommended his Retirement Millionaire subscribers buy shares of Alphabet back in December 2016.

The wild profits Google makes from ad revenue (about $136 billion in 2018) have long been at the heart of its business model... and it allows the company to spend some of that money on new projects to collect more data. As Doc wrote in that December 2016 issue...

These are things like Google's self-driving cars, its Google Fiber Internet service provider, the Nest home-automation system, Verily life sciences, and other high-concept technologies.

For the year, these Other Bets cost about $3.6 billion (in 2015) as measured by operating losses. Out of more than $80 billion in revenue, that's a reasonably small price to pay.

And should just one of those Other Bets pay off, it could make up for all the losses quickly. Consider that projects like the Android mobile operating system or the purchase of YouTube [which Google bought in 2006] would have been considered Other Bets when they started.

Considering YouTube is the second-most-viewed website in the U.S. and the world's second-largest search engine behind Google itself, it's safe to say that sometimes these other bets can pan out big time for the company.

But Washington isn't exactly high on Silicon Valley these days...

And this feels like another privacy controversy waiting to happen.

What about regulation?

Remember, just this week, reports broke about Google's partnership with hospital chain and health insurer Ascension. In short, this partnership has resulted in the transfer of 50 million Americans' medical records to Google.

Federal regulators announced an investigation within two days of the news. They wanted to determine if the companies have violated patients' HIPAA rights – regulations that have protected the privacy and security of certain health information since the law went into effect in 1996.

Doc Eifrig – who you may remember is a medical doctor – told us today that he has spoken with several people in the health care sector who feel a sense of "betrayal" and "distrust" from Google.

So long as the company doesn't "scrape stuff that they shouldn't be scraping" – meaning data – Doc said that there's no reason to think a checking-account service wouldn't be successful for the company. "It's a natural way for them to serve up ads," he said.

Doc even said he "wouldn't be shocked" if Google joined with an investment firm – like Goldman Sachs (GS) – on a partnership.

Doc and his team remain bullish on Google... and the company's ability to make "Other Bets" like these is just one reason why.

Since Doc first recommended the company to Retirement Millionaire subscribers in December 2016, shares are up more than 60%. But it remains a "Strong Buy" today.

In today's mailbag, Crypto Capital's Eric Wade and Fred Marion respond to several readers' questions and concerns about cryptocurrencies after Wednesday's Digest. As always, send your comments to feedback@stansberryresearch.com.

"[You wrote:] 'The beauty of bitcoin is how the number in existence is limited and kept track of by blockchain technology. You can think of blockchain as a virtual ledger book... essentially a database secured by cryptography and maintained by a network of computers.'

"I have read various versions of the above paragraph since I started reading/hearing about the blockchain. If the above is true, how is it possible to hack the various crypto sites (and individual wallets) stealing millions of dollars' worth of cryptocurrency over the last decade?

Put another way, how can anyone suddenly have all this bitcoin in their possession (which has been verified by the blockchain) without a digital trail of where the cryptocurrency came from? Yet on the headlines is the story of how much crypto has been hacked with no idea where it went? I am no computer or crypto expert but there seems to be a major contradiction or lots of b.s. about the security of the blockchain. Thank you for letting me rant." – Paid-up subscriber Glenn J.

Eric Wade and Fred Marion comment: Great questions. Yes, it looks like a glaring contradiction, but there is an explanation...

In a nutshell, when bitcoin gets "hacked," it's never the bitcoin network itself being hacked. And that answer isn't just an artful dodge... Most hacks are actually attacks on crypto exchanges or personal wallets where people store bitcoin.

If hackers tried to attack the bitcoin blockchain, they wouldn't get far. See, the amount of computing power in the bitcoin network is just mind-boggling. It's approaching speeds of 1 million times faster than the world's most powerful supercomputer.

Of course, while the bitcoin blockchain is secure, hackers do still steal bitcoin. If you buy bitcoin and use top-notch security protocols, your bitcoin can't be taken. The thieves know that... So they wait for someone to do something wrong. It can happen in a lot of ways...

Hackers could impersonate you and drain your funds from a crypto exchange... Malware could give a rogue user access to the files on your computer... Or you could enter your "private key" – basically your password to access your bitcoin – on a fake website.

You also touched on another important point with your feedback...

How can someone get away with stealing bitcoin if there's a digital trail?

Sometimes, the digital trail makes it possible to track down the hacked funds and recover them. But that isn't always the case because some hackers use different ways to cover their trail. And in some cases, the stolen coins get mingled with others in an attempt to confuse anyone trying to track them. Think of stolen art, which is highly recognizable, or cars that have their VIN stored in a database... Thieves still take both of them, right?

Once a hacker has access to your bitcoin, he can launder it...

"Tumblers," for example, take in bitcoin from several sources (some fully legal and some perhaps not)... execute a lot of random transactions, like a card dealer shuffling the deck... then spit the bitcoin back out to brand new bitcoin addresses.

That makes it extremely hard for law enforcement officials to pinpoint exactly where specific amounts of bitcoin originated. The bitcoin blockchain itself isn't hacked in these instances. It's just manipulated in ways to muddy the holder's digital footprints.

Now, you might ask why we don't ban tumbled coins...

Because there are legitimate reasons to tumble coins, too. Some users do it simply because they value their privacy. Or they're doing something a particular crypto exchange might not approve of... like using bitcoin on a completely legal online gambling site, for instance.

With that said, tumbling and other laundering techniques are difficult to pull off. And law enforcement has successfully used the blockchain to put several hackers behind bars. Just as criminals find ways to launder cash, they'll always seek out ways to launder cryptos, too.

More important, we believe making private digital transactions is a fundamental right that should be preserved... just as cash lets us make private transactions in dollars.

"'They believe – as I do – that bitcoin could one day overtake the U.S. dollar as the world's most important currency.'

"No way [bitcoin could overtake the U.S. dollar as the world's most important currency]. Every government threatened by bitcoin will outlaw it, if it doesn't self-destruct." – Paid-up subscriber Kendrick M.

Wade and Marion comment: First, let us point something out...

While it's impossible to precisely value all financial derivatives, experts estimate that the total value of derivatives worldwide is worth more than the cash, gold, stocks, real estate, or other assets that these financial contracts are – for lack of a better word – derived from.

In the past few decades, financial experts have created an estimated $1.2 QUADRILLION DOLLARS of derivatives... which are all on the books with market values priced in U.S. dollars, euros, Japanese yen, and other currencies. All the currencies in the world are estimated to be worth roughly $90 trillion today.

In other words, the world's governments stood by and didn't pass laws to prevent financial professionals from creating derivative financial instruments worth 11 times all the money in the world.

You might be right that governments could see bitcoin as a threat and attempt to outlaw it. And some folks will respond by divesting. But we can't predict what the folks seeking a sound money that's unbeholden to central banks and governments do.

Speaking purely from a technology angle, it's possible that outlawing bitcoin would be as effective as outlawing alcohol or private gold ownership in the early 20th century in America.

Of course, this topic is something we think about a lot...

You can't not think about it if you're going to invest in the space. But we're always pulled back to the fundamental reason why we have money in the first place... It's just a tool.

It's a way to temporarily hold value today... so you can trade it for something else tomorrow. The last thing you want is for that value to erode.

Throughout history, humans have used all sorts of things as money... from seashells to rocks to gold. The money that wins out in a particular time and place is the money with the best properties.

Things like divisibility, portability, and durability are all important. But the most important quality of all is that it has a relatively fixed supply.

Inflation should be low or even non-existent. That's the big advantage of bitcoin over the U.S. dollar. The government is printing the dollar into oblivion. Meanwhile, we have this alternative – bitcoin – that will eventually have zero inflation.

No one can predict what will happen tomorrow, but we believe there will be a war for the future of money. And the money with the best properties will win. There's simply no other form of money with properties that rival bitcoin's right now. Those properties are so good, bans simply force people onto the black markets.

We'll leave you with one last point...

If the government were better at managing the money supply, there wouldn't be much need for bitcoin at all... Private digital payments are vital, yes, but what really attracted us to bitcoin is this nagging threat of hyperinflation hanging over our heads.

Bitcoin offers a different path. And people are waking up to this...

We need a form of money that can't be manipulated. That means a form of money that exists beyond the control of governments and small groups of people. We need a math-based currency... one that follows its own laws and doesn't change on a whim.

One of the most profound changes in human history was the separation of church and state. Today, we're seeing the earliest signs of a separation of money and state.

That will have a profoundly positive impact on humanity. It will, for the first time in more than a century, force our government to spend within its means.

Who doesn't want to see that? We agree with you that the road to that promised land will be rocky, but we'll get there. The best available form of money always wins out in the end.

"Hello, I'm no expert, but I've been following development in the crypto space for a few years now [I bought 100 ether tokens at $10 only to have it stolen from a digital wallet as it was moving to $1,440 before the downturn in 2018...]

"My question for Eric Wade and his team: I agree that bitcoin and other decentralized digital tokens pose a serious threat to central banks and the establishment. What is preventing central banks from buying all available cryptos and keeping them out of the market? Should this happen, only those 'true believers' that bought in early and will never sell will own cryptos and there will be no liquidity.

"Can the sort of scheme described above work to prevent cryptos from becoming a 'currency of the people'? Thanks!" – Paid-up subscriber Andy L.

Marion comment: Andy, I'm so sorry to hear that your Ethereum was stolen. Things like that paint the entire industry in a poor light. The fact that you're still engaged in crypto gives me hope that it'll achieve its vision of replacing fiat money, though.

If the world's governments tried to buy all the available cryptos, they'd have to do it with inflated dollars... And ironically, that would make the argument for holding bitcoin even stronger (since it will eventually have zero inflation).

Under your scenario, we would see the laws of supply and demand kick in instantly. Some people might sell their cryptos to the government, which would take supply off the market.

That would cause the price to rise, and it would require the government to raise its buy price even higher. On and on the cycle would go until we saw hyperinflation in the dollar... or the government simply gives up.

In the end, I don't worry about the supply of bitcoin getting too small.

That's because you can subdivide a single bitcoin into ever smaller increments... currently down to eight decimal points. Even if there were just 1,000 bitcoin on the market, we could still trade it in tiny fractions. Those fractions would just be worth more and more in dollars.

Regards,

Corey McLaughlin
Baltimore, Maryland
November 15, 2019