Our Biggest Fear Could Become a Reality
Our biggest fear could become a reality... The next move in negative rates begins... Get ready for more central bank easing... Bad news for pensions... Doc's latest safe-income investment...
It is one of our biggest fears about the spread of negative interest-rate policy...
Central banks have pushed short-term rates below zero in much of the world. This has set off a chain reaction that has pushed up prices – and pushed down yields – in practically every debt market around the globe, and made it virtually impossible for savers and retirees to earn safe income in traditional investments today.
This situation is frightening enough... But our greater fear was that struggling banks – which are currently shouldering the worst of negative interest rates – would eventually have no choice but to pass negative rates on to their customers... and begin charging them interest on their savings.
This is the situation that keeps us up at night. The next move in negative rates could trigger a massive, global "run on the bank" as folks begin hoarding cash and gold to protect their savings from these penalties.
We're sorry to say that day may now be here...
Earlier this week, Dutch bank ABN Amro (ABN.AS) became the first large bank in the world to announce plans to pass negative interest rates on to customers. According to its website, the bank is currently updating its policies, and could begin charging interest on business checking and savings accounts as early as October 1.
This morning, Royal Bank of Scotland (RBS) – one of the largest banks in the U.K. – sent letters to more than 1 million business customers warning it could soon do the same.
It singled out the upcoming Bank of England policy meeting, at which Britain's central bank is largely expected to slash interest rates following the recent "Brexit" decision. The bank promised to do everything it could to protect customer accounts, but said it would "consider any necessary action in the event of the Bank of England base rate falling below zero."
Regular Digest readers aren't surprised this is happening. Events are playing out almost exactly as Porter's "Metropolitan Man" had warned. But we must admit... even we have been stunned by just how quickly things are moving.
We continue to believe the end game is clear: As money flees the crumbling paper-currency system, it's going to flood into gold and other precious metals... and push prices to heights that are unimaginable today.
In the meantime, as Porter noted on Friday, something interesting is happening in the precious metals market right now.
He and his team have been busy working on brand-new research for Stansberry Gold Investor subscribers... and they believe this new opportunity is so big, they're actually changing the name of the service.
Keep an eye out for a special announcement with all the details tomorrow.
In related news, the European Central Bank ("ECB") held its latest policy meeting late last week.
The bank held short-term negative rates steady and left its quantitative-easing program unchanged, but ECB President Mario Draghi promised the bank stood "ready, willing, and able" to add more stimulus if needed... And the market yawned.
This is a notable change from the past, when big promises from Draghi alone could push the euro lower. It suggests the influence of the ECB's current policies is waning.
This likely leaves the central bank with just two options: admit defeat, or do even more. Which do you believe is more likely?
Japan is in a similar situation...
Despite the government's best efforts to debase its currency – including a recently announced stimulus package – the yen has been rallying again. It hit fresh multiweek highs against both the dollar and the euro this morning.
The Bank of Japan is set to announce its latest policy decision this Friday. We won't be surprised if additional easing – or "something else" – is suddenly on the table.
The news for U.S. public pensions just keeps getting worse...
Longtime readers are familiar with their plight. In short, state and local governments across the country have officially promised more than $1 trillion to workers and retirees that they simply don't have.
Yet even this figure understates just how big these problems are... That's because funds are still using laughable forecasts of 7%-8% annual returns or more.
Meanwhile, the returns these funds have actually been earning continue to plunge. As the Wall Street Journal reported last night...
Twenty-year annualized returns for public pensions in the U.S. are poised to decline to 7.47% once fiscal 2016 results are released in coming weeks, according to an estimate from Wilshire Trust Universe Comparison Service, which tracks pension investment returns.
That would be the lowest-ever annual mark recorded by Wilshire, which began tracking the statistic 16 years ago. In 2001, near the height of the dot-com boom, pensions' 20-year median return was 12.3%, according to Wilshire.
Note that these are annualized returns over the past 20 years. These numbers are inflated by the relatively high yields of bonds in the past.
Thanks to record-low interest rates, pensions aren't earning anywhere near 7% today. And the latest results from two of the largest and best-known pensions bear this out...
Last week, both the California Public Employees' Retirement System ("CalPERS") and the California State Teachers' Retirement System ("CalSTRS") – which oversee a combined $484 billion for 2.6 million workers and retirees – reported their weakest annual returns since the financial crisis.
How bad was it? According to the Journal, CalPERS earned just 0.6% last year, dropping its 20-year returns to just 7%.
It won't take many more years of returns like these to bring these funds' long-term returns back to reality... And barring a dramatic move higher in interest rates, these results aren't likely to improve anytime soon.
Finally, if you're in need of more safe income today, our colleague Dr. David "Doc" Eifrig just shared another great opportunity...
Regular readers may recall Doc recently recommended preferred shares – a "hybrid" investment that combines the best characteristics of stocks and bonds.
In the latest issue of his excellent Income Intelligence advisory, published last Thursday, Doc recommended a similar type of investment called "convertible bonds." From the issue...
Most investors have never purchased a convertible bond. It's a small market... with total global outstanding assets of $200 billion, or about 0.5% the size of the $37 trillion U.S. bond market.
Convertible bonds may sound complex, but they are extraordinarily simple. They're even simpler than preferred shares...
Convertible bonds are just another easy way for businesses to raise money. The entire model fits into two sentences: These bonds pay a fixed interest rate. And you can choose to convert them to a certain number of shares. That's the entire idea.
As Doc explained, convertibles offer the safety of bonds with some of the upside of stocks.
For example, even if the underlying business struggles, you can do well. So long as the company doesn't go bankrupt, you'll collect a solid yield and get your money back in the end, just like a bond.
On the other hand, if the business does well and the stock price soars, the value of the convertible bond will rise with it.
Doc says convertibles also tend to be much less volatile than the stock market as a whole... When the market falls, they tend to fall less harshly.
And just like preferred shares, they're as easy to buy as common stocks... meaning you don't need any special knowledge of the bond market.
Doc's favorite convertible investment offers a safe 5%-plus yield today. Even better, it's currently trading at a 10%-plus discount to its true value... Doc says buying it now is like buying $1 of assets for less than $0.90.
You can get instant access to Doc's latest recommendation with a risk-free subscription to Income Intelligence. Click here for the details.
New 52-week highs (as of 7/25/16): Cisco (CSCO), Mead Johnson Nutrition (MJN), and Microsoft (MSFT).
In today's mailbag, one subscriber shares a warning about the upcoming election... and another asks about the best financial gifts for grandchildren. What do you think? Let us know at feedback@stansberryresearch.com.
"Dear Porter, the two letters in today's Digest suggested that you should take sides in the coming elections. I would advise against it, for two reasons (and as my $0.02).
"First, we have little in concrete proposals from any of the candidates, at least any that are realistic. As was written in [yesterday's] Digest, both major candidates are avoiding dealing with the deficit. And it is well understood that if candidates actually fulfilled all their promises once elected, they would truly bankrupt the nation! I recall a by-election many years ago in an Australia state, where the Government of the day particularly wanted to win that seat. Someone added up the promises made to that electorate by the government and the total was more than the entire annual state budget! Not much changes, even across the years, parties, countries and continents.
"The second reason is also alluded to in recent Digests. The monied elites mostly run the country and they are not up for election. America has the best Congress that money could buy, and while the President proposes, Congress disposes. The Obama administration's term of office has demonstrated this truism, doubled in spades. Until the monied elites are radically changed (which will only occur when they are emasculated [the unkindest cut of all]), it really doesn't matter who is President... As you keep pointing out, we cannot expect the government to save us, or do anything but stand idly by as the people controlling the system screw us. So we have to sort ourselves out, in spite of the government.
"In a plutocracy, democracy becomes just a pantomime, the real opiate of the masses. Bread and circuses, and boy, is Trump putting on a circus and a half! Coming from a country with a long history of well-established democracy, as well as a very active level of political debate, I have been startled, even after 20 years here, at the ignorance of most Americans about political systems and ideas. This makes it to implement the mushroom approach: keep 'em in the dark and feed 'em bullshit.
"This is also why I greatly appreciate your effort at education in financial matters. I am little more than ignorant myself, but I feel I know so much more than I did before I started reading your (collective) work. As a scientist, I can deal with conflicting evidence, recognizing the 'blind men and the elephant' situation that we all face. This is why I laughed uproariously at the letter-writer last week with his 'The sky is falling' analysis of some of your writers. Keep up the good work!" – Paid-up subscriber Bill H.
"I know you cannot give advice as such, but we wish to make annual gifts to our grandchildren and don't quite know which way to go. My parents gave us savings bonds every birthday that matured at 21 yrs. In todays environment I'm not thinking this is the way to go. Any general suggestions?" – Paid-up subscriber Mark M.
Brill comment: If you believe, as we do, that precious metals prices are likely to be much, much higher several years from now, you might consider giving them gold or silver bullion – these are the plain "vanilla" coins and bars that aren't rare and have no collectible value – or "semi-numismatic" collectible coins.
Even if you're not looking to spend much, this is an option. You can get a one-ounce silver bullion coin for a little more than $20 today.
When buying bullion, the key is not to pay an inflated premium over the spot price of the metal itself. And in either case – but particularly when buying collectible coins – you'll want to be sure to work with a dealer you can trust. We've heard many stories of unscrupulous companies taking advantage of novice customers.
There are several reputable dealers out there, but one we know well is David Hall Rare Coins. As always, we receive no compensation for recommending them, but David and his business partner Van Simmons have treated our subscribers well in the past. And they're certainly reputable... They personally founded the Professional Coin Grading Service ("PCGS") – the world's first standardized rating system to gauge the quality of collectible coins.
You can reach David and Van at (800) 759-7575 or (949) 567-1325, or via e-mail at info@davidhall.com.
Regards,
Justin Brill
Baltimore, Maryland
July 26, 2016
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