Is the Fed Laying the Groundwork for Negative Rates?

Tesla announces its new 'master plan'... The Bank of Japan disappoints... New rumors of 'helicopter money' are already circling... Is the Fed laying the groundwork for negative rates?... New data show the U.S. economy is slowing...

One of Porter's favorite whipping boys – electric-car manufacturer Tesla Motors (TSLA) – is back in the news...

We reported in June that Tesla – where company founder Elon Musk is CEO and the largest shareholder – offered to acquire solar-panel installer SolarCity (SCTY)… where Musk is chairman and also the largest shareholder.

It seems the incestuous deal could soon become a reality. According to news service Reuters, the two companies could announce a merger agreement before the day is over.

As we explained in June, the deal appears to be an obvious conflict of interest and a de facto bailout of the failing solar-panel firm.

But Musk says that isn't the case. Instead, he claims the deal is part of a new "master plan" revealed last month...

According to the announcement on Tesla's website, Musk plans to combine Tesla's batteries with SolarCity's panels to create an integrated energy generation and storage company.

He also wants to expand Tesla's product offerings from cars and SUVs to pickup trucks, semi-trucks, and "high passenger-density urban transport vehicles" (buses), all of which will eventually be fully autonomous.

Musk admitted this plan would cost the company tens of billions of dollars to carry out. But he said costs would be spread out over time.

He also said – with a straight face, we can only assume – that the multibillion-dollar plan would require only a "modest" capital raise. It could be mostly financed by sales of Tesla's new lower-cost Model 3 electric car.

Regular readers know we're skeptical...

As Porter and his team have shared many times in the Digest, the business models of both Tesla and SolarCity are broken beyond repair. Both are dependent on government support and huge infusions of cash to survive... and their access to both is rapidly vanishing.

In short, these companies can't make money today. Yet somehow, Musk believes they will not only suddenly become profitable... but they'll also magically produce tens of billions of dollars in profits over the next several years.

Maybe Musk will find a way to keep the subsidies flowing a while longer. Maybe he'll successfully raise the tens of billions of dollars of capital he needs. Maybe he'll even achieve the lofty goals of his latest "master plan."

Those are a lot of "maybes"... But even if he can somehow pull it off, there's virtually no path that doesn't involve massive dilution of Tesla shareholders.

On Friday, Japan's central bank – the Bank of Japan ("BoJ") – announced its latest monetary policy decision. And the market wasn't happy...

Many expected the BoJ to increase its massive quantitative easing ("QE") bond-buying program – or even push interest rates further into negative territory – to coincide with the government's newly-announced stimulus program.

Instead, the BoJ left its QE bond program unchanged and held interest rates steady. It did announce that it will double its relatively small purchases of Japanese equity exchange-traded funds.

Japan's currency, the yen, soared nearly 2% against the dollar following the news. Both Japanese government bonds and the benchmark Nikkei 225 Index fell.

The news left many analysts thinking the BoJ was giving up.

As Kit Juckes, global fixed-income strategist at Societe Generale, put it to financial news network CNBC at the time: "The message the BoJ is sending is not so much 'whatever it takes' as 'monetary policy's pretty much played out.'"

But that view didn't last long. New rumors of action were already circulating this morning...

You see, the BoJ also promised to "assess" its current monetary stimulus programs at its next policy meeting in September.

Given the big move higher in the yen on Friday, expectations are already building that the BoJ will finally adopt some form of "helicopter money" next month. As Reuters reported this morning...

With little to show for three years of massive monetary easing, economists say BoJ governor Haruhiko Kuroda's "comprehensive assessment" of policy could push it into closer cooperation with Prime Minister Shinzo Abe, who announced a fiscal spending package worth more than 28 trillion yen ($275 billion) on Wednesday in a bid to kick start growth.

"The comprehensive review might be the first step toward further collaboration with the government, hinting at helicopter money," said Daiju Aoki, economist at UBS Securities.

"The government could issue 50-year bonds, and if the BoJ makes a commitment to hold them for a very long time, that would be like helicopter money."

Meanwhile, here in the U.S., there are signs the Federal Reserve could quietly be preparing to join Europe and Japan in adopting negative interest-rate policy.

Last week in Forbes, financial writer John Mauldin noted a subtle change that could indicate negative rates are closer than almost anyone believes.

He noted that a member of Congress asked Federal Reserve Chair Janet Yellen in February if the Fed had "legal authority" to use negative rates. She said the Fed had not looked into it, and she did not know the answer.

Later this spring, she sent an official reply to the congressman. And while she did not address the issue of legality, she did note that she "would not completely rule out the use of negative interest rates in some future very adverse scenario."

Finally, Yellen appeared before Congress again on June 21. When the issue was raised, her stance had shifted. She said she didn't believe additional "accommodation" would be necessary and negative rates weren't being considered.

But that time, she noted that the Fed did have legal authority to use them if they chose to do so.

In short, over the past few months, Yellen has quietly moved from not knowing if the Fed had authority to use negative rates to clearly stating that it does.

Mauldin believes if the data suggest the U.S. economy is falling into recession, the Fed will not hesitate to push rates into negative territory.

We're not there yet... But the latest official government data show the economy is slowing dramatically...

On Friday, the government reported the U.S. economy grew just 1.2% in the second quarter of 2016. This is the lowest annual rate since 2010. And it's far below analyst expectations of 2.6%. Worse yet, the government revised its first-quarter growth figures down from an already weak 1.1% to just 0.8%.

Regular readers know we've been warning for months that the Fed could eventually have no choice but to adopt negative interest rates, too. More and more evidence suggests that day is quickly approaching.

We're beginning to feel like a broken record... But if you still haven't taken our advice to protect your savings with select precious metals investments, you could be making the biggest mistake of your financial life. We urge you to act now, before it's too late.

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In today's mailbag, several subscribers send praise for Friday's Digest... and it seems Porter's "stoner" mailbag touched a nerve. What do you think? Let us know at feedback@stansberryresearch.com.

"Porter, you have presented a crystal clear summary of what is happening in the recent Digest. I have read all the Digests, but I don't know how you can be any clearer than you were on 7/29. Keep up the good work!" – Paid-up subscriber Lauren A.

"Greetings Porter, Thanks for the endless effort to educate and warn. Keep up the good work, and I would like to add my vote to the 'keep Porter' campaign." – Paid-up subscriber W.F.

"Porter, regarding your statements that: 'Most public companies are so poorly managed and the accounting in these companies is so commonly 'finagled''... and: 'The biggest obstacle to understanding the true market multiple is the accounting.' and: 'Simply put, these numbers aren't real.'

"As a retired CFO I completely agree. In fact, I have always said 'Profit is an opinion but cash is a fact.' Even if a company doesn't try to 'finagle' the numbers, the definition of profit changes every time there is a change in the rules as recently happened with the 'Revenue Recognition' rules and the 'Lease Accounting' rules. Some of these issues are addressed in my book 'Real Numbers: Management Accounting in a Lean Organization.'" – Paid-up subscriber Orest Fiume

"In response to Porter's 'a stoner is fine with me'... I did research on alcohol and pot in college. Alcohol is MUCH worse for you than pot (except for the smoking which is very carcinogenic). There are thousands of beneficial chemicals in pot and these can now be given without the mind-altering THC.

"Nobody has ever died of pot OD directly. As long as the person is not operating machinery/car OR making decisions at the time, weed is better than alcohol any day. Stoners listen to tunes and chill – drunks pick fights and kill!!" – Paid-up subscriber David B., MD

"Agree with your comments and the person who commented doesn't know a thing. Been a lifelong smoker and have been running my own high pressure mid-sized construction company for 40 years and what he claims is erroneous." – Paid-up subscriber M.

"I'm 64 and wish I'd started sooner. That guy must watch too much TV... the propaganda box completely controlled by the state. Johnson would be a far, far better choice than the two bozos that are being shoved down our throats. Stoners do not look for trouble... Bankers, the offence industry, & the Clinton Foundation owned by the elite do!!

"Peace is the friend of liberty & prosperity. War is the health of the state. Killery is already in & has been for a long time. It's he who counts the votes, not he who votes that matters. To those who get it, no explanation is necessary... and to those who don't, no explanation is possible." – Paid-up subscriber A.H.

"When faced with a choice between a power hungry criminal who has a long history of dishonesty and who by any legal standard runs a money laundering slush fund versus a bully, braggart who has yet to discuss any detail regarding his policies, Gary Johnson looks like a great candidate by anyone who takes fiscal responsibility seriously.

"Johnson won't win but the major parties appear to be in their death throes. Clinton and Trump are in nearly the same place on a spectrum of Liberty versus collective good and they are far away from true Liberty shown by Libertarian policies." – Paid-up subscriber Robert Phillipson

"I believe we have one now (stoner). Why would anyone think this President has given it up? 'Mommy Dearest' Hillary could probably benefit from a little (that woman is scary!!!). I don't use the stuff, but know a couple of people who mellow out with an occasional indulgence." – Paid-up subscriber Jackie D.

"Better high on pot than intoxicated on money and power." – Paid-up (sober libertarian) subscriber Steve F.

"I am a proud libertarian. I can't, for the life of me, understand why others of either authoritarian extreme (Republican/ Democrat) feel they have the right to force others into their moral set. As long as one is not harming another, why should they be restrained to conform?

"Rights are not given, nor should they be taken. They are some that are inherent or 'inalienable' as they say. So yeah, Gary Johnson is against the war on drugs. Get yer pitchforks and torches! C'mon, Barry O. smoked. Clinton didn't/did inhale/inhaled. Bush (lesser) prolly partook of the nose candy. Cast the first stone...

"I believe the world would be a better place if every one of us spent the majority of efforts working on our own personal locus of control. If you want to better the world around you, perform acts of kindness and compassion for those in need... provided you're not taking from someone else in the process. Think globally, act locally." – Paid-up subscriber Timothy N.

Regards,

Justin Brill

Baltimore, Maryland

August 1, 2016