Will We Soon See Negative Interest Rates?
One of the most frightening trends in the world today... 'Negative interest rates are already backfiring'... A surprise Federal Reserve meeting... P.J. O'Rourke: Bad news about your taxes...
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Regular Digest readers know we believe the spread of negative interest-rate policy ("NIRP") is one of the most frightening trends we're watching today.
The central banks of the eurozone and Japan have already plunged head-first into NIRP, and it appears to be only a matter of time before the Federal Reserve could join them. As Porter explained in the April 1 Digest...
The likelihood that the U.S. will implement a negative interest-rate policy is worrisome. You might have heard about this new kind of monetary policy. It's like capitalism turned upside down. Instead of being paid to save capital, you're forced to pay just to keep the money you've already earned. Negative interest rates are nothing more than government theft. Its banks literally steal from you every day that you keep your money in dollars, yen, or euros.
"Bond King" Jeffrey Gundlach – the billionaire founder and CEO of DoubleLine Capital – agrees. In fact, he believes these policies are already having unintended consequences. As he told news service Reuters last Thursday...
The negative interest rate experiment seems to be backfiring... The best evidence of negative interest rates backfiring is the yen versus the dollar and the Nikkei.
Gundlach has a point... These policies were sold as a new way to boost a country's economy. They were supposed to enable banks to lend more money, encourage consumers to spend rather than save, and weaken its currency relative to others to help exports.
But that hasn't been the case...
So far, banks have been unable or unwilling to pass these costs to customers. Their profit margins have been decimated. The shares of many banks – particularly big European banks – have been crushed, with several trading below the lows of the 2008 financial crisis.
Instead of saving less, it appears consumers are saving more. Data show savings rates in Europe have been going up as interest rates have gone down. Meanwhile, the Wall Street Journal reports sales of home safes are booming in Japan, suggesting folks are starting to hoard physical cash. And as regular readers know, global demand for gold – the "real money" alternative to paper currencies – has been soaring.
And as Gundlach pointed out, these policies are even having unintended effects in the currency market. As you can see in the following chart, the recent rally in the Japanese yen actually accelerated after the Bank of Japan adopted NIRP on January 29...
Meanwhile, Bloomberg Business reports that investors are beginning to lose faith in "Abenomics," the easy-money "playbook" – named after Prime Minister Shinzo Abe – that Japan has been following.
According to the report, foreign investors have pulled a total of $46 billion out of Japanese stocks for 13 straight weeks, the longest streak since 1998.
Japanese stocks have plunged more than 17% in 2016, second only to Italian stocks for the world's biggest decline this year...
Negative interest rates are completely untested. There's no telling what these policies will actually do... or what kinds of unintended consequences they will create.
Despite their bluster, central banks have no idea what they're doing. The charts above are living proof.
Unfortunately, not everyone agrees...
In a paper published this weekend, the International Monetary Fund said that while it's still too early to draw "definitive conclusions," it supports the move to negative interest rates. From the report...
Although the experience with negative nominal interest rates is limited, we tentatively conclude that overall, they help deliver additional monetary stimulus and easier financial conditions, which support demand and price stability...
Lower risk-free wholesale rates have tended to encourage investors to switch from low yield government securities to riskier assets such as equities, corporate bonds, or property.
Despite the obvious problems, we continue to believe it's only a matter of time before negative rates come to the U.S.
Most of the world's major reserve currencies are already paying negative interest rates. Sooner or later, the Federal Reserve will have to join them.
In the meantime, the Federal Reserve just held an unexpected meeting...
The Fed held its March policy meeting a few weeks ago, and was not scheduled to meet again until later this month. But on Friday, it announced it would hold a "meeting under expedited procedures" this morning at 11:30.
According to the Fed's website, the meeting was scheduled for "review and determination by the Board of Governors of the advance and discount rates to be charged by the Federal Reserve Banks."
The meeting was closed, so we aren't privy to what was discussed. However, the last time a similar unexpected meeting took place was November 21 of last year... less than one month before the Fed raised rates for the first time in nearly a decade.
In addition, Reuters reported last night that Fed Chair Janet Yellen was planning to meet with President Obama and Vice President Biden at an impromptu meeting at the White House this afternoon.
The timing of these meetings could be unrelated, but we can't help but wonder... Could the Fed be planning to make another unexpected move in interest rates later this month? And if so, will it raise rates again... or reverse course and cut them?
We can't say. The Fed has flip-flopped again and again since it raised rates in December. Frankly, neither move would surprise us.
Either way, expect more volatility as the April meeting approaches... According to CME Group's FedWatch tool, the market is "pricing in" a less than 5% chance of a rate increase this month... and a 0% chance of a rate cut.
Any move at all would be a huge surprise... and could send ripples through the global currency markets. Make sure you own some gold.
New 52-week highs (as of 4/8/16): Ciner Resources (CINR), Market Vectors Junior Gold Miners Fund (GDXJ), Kaminak Gold (KAM.V), Lundin Gold (LUG.TO), Altria (MO), Newmont Mining (NEM), NovaGold Resources (NG), New Gold (NGD), Prestige Brands Holdings (PBH), Seabridge Gold (SA), and Wells Fargo – Series W (WFC-PW).
More subscriber feedback on our recent Emergency Briefing and our new Stansberry Gold Investor service. Be sure to let us know what you think at feedback@stansberryresearch.com.
"You did an amazing job, as usual, on the Gold webinar. Thank you so much for all your hard work, passion and dedication to your craft. The work you do is immensely beneficial, more than I can even put into words here, and it just makes me more proud and thankful to be a Stansberry Research subscriber. I hope new subscribers take the time to realize they are getting top-notch financial education, not just 'stock picks.' In my opinion, the education is the REAL value of Stansberry Research." – Paid-up subscriber Kris K.
"First off, Porter, I want to encourage you. Your team has educated me in finances so much, I could never repay it. I have been unable to follow through on some of your recommendations because my financial situation dictates caution and frugality. But, be advised: You and your team are a trove of very useful information that all Americans should tuck away for use when they can.
"Your message on Wednesday has been magnified by information from a soon to be released author that I listened to last night. I wish I could remember his name or the name of the book, but he was spot on. Ironically, I read about all of this in the 80's when I read the book: 'The day the dollar dies.' At the time, I did not have the full understanding of what I was reading, but I am watching it unfold before my eyes.
"I will tell you, as I write this, there are tears in my eyes, because, in my 82 years, I have lived through WWII, the Korean, Vietnamese, 1967 Israeli war, Desert Storm, Russian Afghanistan, Kuwait, Iraq, US Afghanistan war. I have seen my children suffer and wonder why they work like beavers and cannot get ahead. I remember the 70s and 80's when interest rates on a home were 18% and some of my friends were so desperate, they bought.
"I just wanted to let you know you have my undying loyalty and appreciation for the work and dispersed information from you and all your hard working associates. Thank you. Please tell your wife and children I thank them also, because they spend a lot of time without you so that you can pursue your work." – Paid-up subscriber R.J.
"I've never written to you. However, I've been reading your words for years. The information you've provided me has been priceless. Thank you for my continuing financial education. I've subscribed to a few of your newsletters and dropped a couple. All in all, I'm quite satisfied ... I have to agree with your insight about adding gold to one's portfolio. I bought some bullion. I started adding various gold stocks around 2008 after following the market for several years prior to that. Needless to say, my timing sucked! That's when I learned my lesson. After reviewing previous history I determined gold is cyclical. Get in early and at the bottom. Enjoy the ride, its ups and downs and pay close attention to the top.
"Always be prepared to jump off the ride at or near the top. The ride back down sucks. Well, that ride has started again and this time I am in at the bottom. I agree with your reasoning as to why gold is taking off. Debt, negative interest rates, overvalued markets etc. The Metropolitan Plan is intriguing to say the least. There is one thing I know for sure though. Gold should be a part of every portfolio. If not as insurance simply to add balance. Thanks for the webinar, Porter. I'm still smiling and plan on smiling often over the next few years." – Paid-up subscriber B.H.
Regards,
Justin Brill
Baltimore, Maryland
April 11, 2016
P.S. Be sure to read on for a great new essay from best-selling author and Stansberry Research contributing editor P.J. O'Rourke...
Bad News: Your Tax Bill Is Double What You Think It Is
By P.J. O'Rourke
Paying taxes makes us – well, it makes me – need a drink.
April 15 gives us plenty of reasons to drown our sorrows.
When we pay taxes, we know we're funding waste, fraud, and abuse.
There's so much waste in our government that Washington is like a sewage system running in reverse. We're paying to pump crap into the White House, Capitol, and Supreme Court.
Government fraud is pervasive. We might as well take the Form 1040 "Amount You Owe" and give the money to some guy who sent us a spam e-mail from Nigeria.
And government abuse of power and privilege is severe enough that if our federal, state, and local political leaders were our parents, all 319 million of us Americans would be in a foster home. (Maybe the Cayman Islands will take us in.)
Then there's the tax code. The U.S. federal tax code is 74,608 pages long. That's more than two times the length of the Encyclopaedia Britannica. It would take more time to figure out the U.S. tax code than it would take to learn everything there is to know... twice.
And the tax rate is exorbitant. Most of us – if we're working hard, minding our own business, and keeping America strong and prosperous – are being taxed at a rate of at least 33%.
One-third of our income! Is the government doing one-third of our job? Is the government doing one-third of our household chores? Is the government doing one-third of anything for us?
If our spouse is feeling romantic and we're tired, does the government come over and take care of the foreplay?
(Well, maybe, if Bill Clinton gets back into the White House...)
No, the government is not doing one-third of our duties and work. It's the other way around. We pay the government a fortune in taxes. Then, practically everything the government is supposed to do for us, we have to do over again at our own expense.
What's really infuriating about paying taxes is how we end up paying double for what we're told our tax dollars are buying us.
Start with welfare. Our taxes pay for all sorts of federal, state, and local welfare programs to provide for people who are unable to provide for themselves. But somehow, those people wind up homeless and begging on the street or lined up at our private charities and food banks, where we have to provide for them again.
And no amount of taxpaying seems to let us off the hook for our bum of a brother-in-law, flopped jobless on the couch watching Cartoon Network on the flat-screen TV we paid for...
Or our 27-year-old kid, who's still living in our basement because when he went to college (a college supported by huge tax-money grants, but for which we were still expected to pay full tuition), he majored in "holistic dance therapy."
Speaking of schools, our taxes pay for Alger Hiss Public High School – conveniently right down the street, inconveniently full of heroin and 9 mm handguns. So we also pay tuition at Friar Torquemada Parochial High.
The most important function of government is to protect our persons and property. That's what the police department is for. We pay taxes for the police. And we still pay for burglar alarms, private security patrols, and guard dogs.
(Such as my family's guard dog, Pinky-Wink. For the information of any prospective burglars, Pinky-Wink isn't really a shih tzu. He's... um... a Rhodesian ridgeback, weighing 100... make that 150 pounds. Uh, the children named him. Stop yapping, Pinky-Wink.)
With government, if we don't pay double with money, we pay double in time and effort.
But usually it's money. When we pay a hospital bill, we're really paying two hospital bills. We pay one bill because we have a job and/or private insurance and can pay for our care. Then we pay another bill, which is tacked on to the first, to cover the medical expenses of someone who doesn't have a job and/or private insurance and can't pay the hospital. Our tennis elbow underwrites the Alger Hiss Public High School student's 9 mm handgun wound.
And never is paying double as doubly troubling as it is in the matter of retirement. We have to pay into Social Security... and our IRA... and our Keogh Plan... and put some money in our savings account, too.
We have to pay Medicare tax... and buy Medicare supplemental insurance... and contribute to a health-savings account... and make doctor and hospital bill co-payments.
But the funding for Social Security and Medicare is so financially shaky that we cannot be certain those programs will exist by the time we're eligible for them, even if we're 64 ½.
Would you like to know what taxpayers are getting out of this deal? How do you and I benefit from this twinning, this two-ing, this duality? Damned if I can figure it out.
Bartender, make that a double.
Regards,
P.J. O'Rourke
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