This Is Not Normal
This is not normal... An unbelievable new record in bonds... Big banks are revolting against NIRP... 'Hoarding billions in vaults'...
If you remember nothing else from today's Digest, remember this: What is happening in the markets today is not normal.
News that would have been considered unthinkable just a few years ago has now become routine...
For example, we note the yield on 10-year German bunds – the European equivalent of 10-year Treasurys here in the U.S – plunged to a record low of 0.033% today.
Said another way, the benchmark sovereign debt of one of the world's most important economies yields less than one-half of one percent. And analysts believe it could hit 0% as early as this week.
Of course, European sovereign yields are plunging thanks to the European Central Bank's ("ECB") massive easing programs.
The ECB's quantitative easing program has purchased more than 1 trillion euros of bonds so far. Its easing program is now officially bigger than those of the U.S. or Japan, on a relative basis. But it's about to get even bigger...
Effective today, the ECB is buying European corporate bonds, too. The program will officially target only investment-grade corporate debt, but that rule comes with a catch. As Bloomberg reported this morning...
The European Central Bank didn't shy away from the region's riskier securities when it began buying corporate bonds on Wednesday.
Purchases included notes from Telecom Italia SpA, according to people familiar with the matter, even though Italy's biggest phone company is rated as sub-investment grade by two ratings firms. The company's bonds are in Bank of America Merrill Lynch's Euro High Yield Index and credit-default swaps insuring the notes against losses are part of the Markit iTraxx Crossover Index linked to companies with mostly junk ratings.
Mario Draghi is showing he's planning to make the biggest impact possible on the first day of corporate bond purchases by casting his net as wide as the program allows. While the ECB has said it would buy corporate bonds with a single investment-grade rating, some investors expected the central bank to start with the region's highest-rated securities.
Yes, you read that correctly. The European Central Bank is now printing money to buy junk bonds.
What could possibly go wrong?
In the meantime, the unintended consequences of the ECB's massive easing programs are becoming undeniable...
Earlier this year, Munich Re – the world's second-largest reinsurance firm – publicly announced it was loading up on gold and cash to counter the ECB's move into negative interest rates.
Today, we learned one of Germany's biggest banks could soon do the same...
According to news service Reuters, Commerzbank is considering "hoarding billions of euros in vaults" rather than paying to keep it with the ECB. From the report...
Commerzbank's examination of storage alternatives to the ECB comes at a time of growing frustration among European lenders with the ECB charge on deposits. Were it to store cash on a significant scale, it would become the first major European bank to take such a step... If other lenders were to follow suit, it could render the ECB penalty charge policy increasingly ineffective.
The ECB imposes a so-called negative rate equivalent to four euros annually on each 1,000 euros ($1,137) lenders deposit with the central bank. This is designed to encourage banks to lend money, rather than park it.
But some banks complain that a dim global economic outlook means there is weak demand for loans on the terms they require, and they have little option but to hoard cash.
Again, these ideas aren't coming from gold bugs, radicals, or conspiracy theorists. They're coming from the executives of major corporations.
If these folks are considering hoarding cash and gold, you can be sure there are plenty of others who are thinking the same thing.
But it's not happening only in Europe...
The Bank of Japan's ("BOJ") easing programs are second only to the ECB's in relative size... But it has pushed interest rates even further into negative territory. Ten-year Japanese government bonds "yield" -0.13%, while 30-year government debt yields just 0.29%.
Recently, the BOJ has hinted it could push rates even lower... and it seems Japan's biggest bank has had enough...
The Bank of Tokyo-Mitsubishi UFJ ("BTMU") is one of several "primary dealers" of Japanese government debt.
In simple terms, this means it acts as a middle man or "market maker" between the government and investors. But this role also requires the bank to bid on at least 4% of every government bond issuance... meaning it can end up holding a lot of negative-yielding debt.
This morning, the bank said it is now considering giving up its role as a primary dealer.
This announcement follows recent criticisms from the company's president, Nobuyuki Hirano. Hirano was the first big Japanese banking executive to speak out on the BOJ's negative interest rate policy, saying it had "caused households and business to rein in spending by creating a sense of uncertainty about the future."
Given the growing backlash against these policies, you might think central banks are reconsidering their stance.
You would be wrong...
In response to BTMU's announcement, the Wall Street Journal reports that "a person close to the BOJ" said it would actually be "welcome news."
Why? Because it would mean that Japan's biggest bank was "diversifying into riskier assets."
What's happening today is anything but normal. And more important, it is virtually guaranteed to end in disaster. As Porter explained in the April 22 Digest...
Over the last 20 years or so, the world has seen an explosion of debt unlike any other period in history. Most of these obligations wouldn't have been financed by the free market.
But rather than live within the means of the free market, governments from almost every major nation have engaged in massive currency and interest-rate manipulation. And that's not all. They haven't merely guaranteed the availability of capital in more and more ways... They've also guaranteed the principal of the loans.
We're already so late in the game that the expense of just maintaining the existing debts can't be honestly financed. Negative interest rate policy ("NIRP") is the new idea. Charging insurers and big banks negative interest rates might work for a while to keep the music playing because the public generally fears and hates these massive institutions.
But what will happen when the government must finally begin to tax the ultimate guarantor in our debt-backed, global banking system? What will happen when the taxpayers face negative interest rates, huge increases in taxes, enormous cuts in benefits, or crashing currency values?
As we've discussed this week, predicting the timing of these events is difficult. But we now have clear evidence that insurers and big banks are beginning to revolt against negative rates.
To those folks who wanted to "fire" Porter for his recent warnings, we have one question: Will you be prepared for what comes next?
New 52-week highs (as of 6/7/16): Bank of Montreal (BMO), Medtronic (MDT), 3M (MMM), Ritchie Bros. Auctioneers (RBA), Silver Standard Resources (SSRI), AT&T (T), Vanguard Inflation-Protected Securities Fund (VIPSX), and ExxonMobil (XOM).
The feedback on Porter's Friday Digest is still rolling in. Send your notes to feedback@stansberryresearch.com.
"Really? Kill the messenger? I can't think of a single place on the planet where I can get better financial information and analysis that affects my investing decisions. But they are my decisions... investing and trading are not decisions that you can delegate to others by blindly following them. In this case I think the disgruntleds didn't even do that. They took the parts of what Porter said that confirmed their own thoughts and then piled on the shorts and got creamed instead of implementing his advice. I myself have been guilty of that at times.
"We as the readers have three responsibilities when it comes to a financial publication: 1) Read it thoroughly, 2) Think about it until we understand it, and 3) Act accordingly. In this case 'two out of three isn't bad' does not apply. Just doing two out of three will lead to wealth destruction. So no, Porter should not be fired for bringing things to our attention and making predictions. I think we all know by now how difficult it is to predict when the market will finally respond to events. We should take comfort in knowing that we have someone looking out for our best interests and warning us of impending danger in the market. Maybe we should fire ourselves if we can't learn from our mistakes and handle our three responsibilities." – Paid-up subscriber Bob B.
"Oh HELL no! No one – politician, economist, hedge fund guru or financial pundit – puts all the warning signs together better, and then has the stones to put their reputation on the line by sounding the alarm. I can't afford the expensive publications and I don't have a large portfolio, but I've learned so much over the last few years of reading Porter, and one of the big things I've learned is that the trend is more significant than the exact timing. So it wasn't May – or, maybe it was and we just can't see it yet. Maybe it only becomes obvious in a few months or next year when we have the advantage of hindsight.
"These are macro trends, they're never going to involve exact timing. Do you want to discount the education & experience and knowledge that's coming up with these predictions? The guy does spend all day looking at markets – maybe he knows a thing or two. Sure he's got something to sell, but what you have to consider is, so does everyone – who delivers?" – Paid-up subscriber LK
"Should you be fired? To quote baseball great Yogi Berra, 'It's tough to make predictions, especially about the future.' So please continue, just don't 'make so many wrong mistakes.'" – Paid-up subscriber Gregg R.
Regards,
Justin Brill
Baltimore, Maryland
June 8, 2016
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