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Are Negative Interest Rates A Supernova Waiting To Explode?

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Are Negative Interest Rates A Supernova Waiting To Explode

Several worldwide central banks, most recently the Bank of Japan, have moved to negative interest rates in an attempt to stimulate the economy. 

The reasoning is that by making it effectively cost money to hoard money, they will incentivize banks to invest in the economy and make loans. 

Bill Gross, of the Janus Global Unconstrained Bond Fund, warns that this may prove to be one of the worst ideas in the history of ideas.

Central Banks Have Been Trending Toward the Low and Even Negative Interest Rates in Recent Years

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As the above graph illustrates, interest rates have plunged since the beginning of 2009, and for some banks, have even dipped into negative territory.  There is no sign of this trend reversing in the near future. 

Even in the United States the rates remain at a low 0.5%, with almost no chance of going up in June.

While one would assume that this is a great environment for credit, the situation is not without its downsides and has occasionally pushed into the territory of the ridiculous. 

The WSJ reported on one couple in Denmark that received interest payments on their mortgage. 

Meanwhile, MarketWatch refers to negative interest rates as a stealth tax, pointing out that the government now charges a fee to keep money in its bank.

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Bill Gross Warns That This Trend Cannot Continue Indefinitely Without Serious and Violent Negative Repercussions.

He points out that there are currently trillions of dollars of negative-rate bonds in the world. 

This graph from February shows how many trillions it was just a few months ago:

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That’s more than 6 trillion dollars of negative-yield bonds back in February. 

Each of those bondholders was effectively paying their respective government for the privilege of being borrowed from. 

And of course, the number has only grown in recent months.

In a Recent Tweet, Gross Touched on the Following:

  • There are now $10 trillion of negative rate bonds in the world.
  • Global yields are the lowest they have been in 5 centuries.
  • The word he uses to describe this situation is – supernova.
  • Supernova references the end stage of a star’s life when it becomes incredibly bright as it explodes and loses the vast majority of its mass.

In simple terms, he believes the current negative-rate situation is a disaster waiting to happen.

This is Not the First Time That Gross Has Spoken on the Matter

He continues to assert that we are in a cycle of expanding credit that has lasted for decades and is now reaching its logical conclusion of negative interest rates. 

He also asserts that this situation cannot keep going on indefinitely.

He does not believe that low rates are stimulating the economy, but that they instead are causing bubbles in various assets because investors want to make decent yields and are willing to accept the risks involved. 

Meanwhile—he asserts—banks, individuals looking for a safe place for their savings, and insurance companies are paying the price for the low to negative rates.

Gross Sees Taking Positions as the Only Solution to the Changing Climate:

  • He says that annualized investment gains are a thing of the past.
  • He also says that investors of sense will have to admit that the market works differently now and take new actions as a result.
  • Shorting corporate credit is one of his suggestions as is buying volatility, or keeping it liquid with cash.

He believes that the market is fundamentally changing, and to maintain principal or make capital gains, the investor will have to change tack as well.

Meanwhile, Gross’s Fund is Doing Quite Well For Itself

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As the graph above shows, Gross’s Janus Global Unconstrained Bond Fund (JUCIX) has been growing all year. 

According to Bloomberg, it has beaten out 72% of Bloomberg peers by going up 3.2% in the last six months.

Gross’s Management Has Brought Returns

The bond fund has achieved a 2.2% return since Gross’s takeover in October of 2014.

Inflow Has Been Strong as Well

In the biggest inflow since the end of 2014, investors contributed $144 million to the fund this May.

Conclusion

In today’s global market, negative interest rates are a reality, and wherever they strike they turn everything topsy-turvy. 

Suddenly, like the couple in Denmark, people are paid to borrow, and bondholders are charged to loan. 

Simply parking money in the bank can cause it to depreciate.

Does this mean, then, that everyone will pull their money out of the banks and go back to that old standby, the mattress? 

It hasn’t happened yet, but Gross raises some valid points. 

If the central banks do not find a better solution than negative interest rates, the market may well be fundamentally changed.

So don’t go stuffing all your money in the mattress just yet, but do pay attention to interest rates and the effect they have on you and your investments. 

You don’t want to be caught off-guard if and when the supernova hits.

 

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Business

Gold ‘Frenzy’ To Build Around Election, Platinum Could Soar 50% By Year-End

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Gold ‘Frenzy’ To Build Around Election, Platinum Could Soar 50% By Year End

Peter Hug, head of the precious metal division at Kitco, believes the Fed’s decision to hold interest rates at near-zero through at least 2023 is bullish for precious metals and particularly gold. He also mentioned the road platinum can head to by the year’s end.

“About three Fed meetings ago they indicated they would hold rates at pretty much zero through the end of 2021 into early ‘22, today they’ve extended that by an additional year, there have been some analysts that are suspecting they will keep rates at zero right through 2024, so we’ve got another almost four years of zero interest rates to look forward to,” said Hug.

“The Fed being a bit more accommodative on inflation indicates to me that it’s a very positive environment for hard assets in general but I think the metals as well will continue to move higher over the next period of time based on the dovishness of the Fed, global central banks and the uncertainty of the US election coming up in about six weeks.”

The State of the Gold and Silver Markets

Hug said the current consolidation phase is a great sign of the overall health of the gold and silver markets. This comes after the frenzy in the gold and silver markets about a month ago.

“The market has been consolidating, which is a very good sign, especially for gold. Gold has been consolidating between our support level of 1925 and 1975 for the better part of two weeks. Silver seems to be between $26.50 – $27.50 range and consolidating as well. The fact that people are not selling into a market that is as frenetic as it was a month or six weeks ago, indicates to me that this market is setting up for the next leg higher once we get through this consolidation phase.”

Availability and Premiums

The gold and silver markets are taking a bit of a breather and the mania has slowed a bit. With this, Hug said the availability of gold and silver coins is getting better. He said premiums are coming down as well.

“On the gold and silver side, dealers are starting to show inventory. That’s not a result of increased production, it’s more a result because of this consolidation phase, retail investors have started to pull back on the markets so there’s not as much buying frenzy in the physical space right now, I think that changes if gold gets north of $2,000 again. But this consolidation of $50 range in gold and the $1, $1.50 range in silver has basically dried up the demand at these levels.”

“So production is still coming on board and dealers are starting to build inventory. And because of that you are seeing premiums come down. Silver maple leafs you can get, again, depending on quantity, somewhere between $5-6 over spot, Eagles are down somewhere between $5-7 over spot, so you are starting to see as this market stays sideways and we don’t see another rush into the buying side from the retail investor, you give it another 2-4 weeks and I think there will be reasonable inventory on the market and premiums should come down.”

Volatility to Return Soon?

Hug said that if you are looking to acquire gold and silver coins, you shouldn’t wait long as we could see volatility return very soon.

“I caution that past October 15 the market is going to be very volatile as we go into the election.”

Other than gold or silver, Hug sees a huge opportunity in the platinum space. There, he expects prices to climb 50% by the end of the year.

“I’m constructive platinum. It is also consolidating in the $900-950 range, but I do anticipate platinum to be north of $1000 and then look to $1200 possibly $1400 before year end.”

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Currency Trading

Dalio: Capitalism Needs Fixing, US Dollar Upended In Next 5 Years

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Dalio: Capitalism Needs Fixing, US Dollar Upended In Next 5 Years

In a recent interview with MarketWatch, Ray Dalio, the billionaire founder of Bridgewater Associates, covered a wide range of topics. These include his thoughts on capitalism, China, the US dollar as the world reserve currency, and much more.

Three Problems

Dalio says the US is facing three distinct problems and is losing ground to China in many ways.

“There are three problems that are coming together,” said Dalio. “So it’s important to understand them individually and how they collectively make a bigger problem,” said Dalio.

“There is a money and credit cycle problem, a wealth and values gap problem, and an emerging great power challenging the existing dominant power problem. What’s going on is an economic downturn together with a large wealth gap and the rising power of China challenging the existing power of the United States.”

“It’s a fact that there has been a weakening of the competitive advantages of the United States over the last couple of decades. For example, the United States lost a lot of the education advantage relative to other countries, our share of world GDP is reduced, the wealth gap has increased which has contributed to our political and social polarization.”

Challenges the U.S. Face

To illustrate the challenges that the US faces as it attempts to stay ahead of China and remain a world power, Dalio says we need to look at Britain and how they eventually lost their position as the world’s reserve currency.

“If you look at British history, the development of rival countries led them to lose their competitive advantages. Their finances were bad because they had accumulated a lot of debt. So, after World War II those trends went against them. Then they had the Suez Canal incident and they were no longer a world power and the British pound is no longer a reserve currency. These diseases almost always play out the same way.”

“The United States’ relative position in the world, which was dominant in almost all these categories at the beginning of this world order in 1945, has declined and is exhibiting real signs that should raise worries. There’s a lot of baggage. The U.S. has a lot of debt, which is adding to the hurdles that typically drag an economy down, so in order to succeed, you have to do a pretty big debt restructuring. History shows what kind of a challenge that is.”

“The United States is a 75-year-old empire and it is exhibiting signs of decline. If you want to extend your life, there are clear things you can do, but it means doing things that you don’t want to do.”

Capitalism Needs Improvements

Dalio is a capitalist (he didn’t become a billionaire through handouts). However, he does acknowledge that the system needs to be improved so that everyone has a chance at financial freedom.

“What has been shown is that capitalism is a fabulous way of creating incentives and innovation and of allocating resources to create productivity. All successful countries have uses for it. For example, communist China has chosen capitalism, which has been essential to its growth.

“But capitalism also produces large wealth gaps that produce opportunity gaps, which threaten the system in the ways we are seeing now.

“We have to be in this together. The system needs to be reengineered to do this. But if we don’t do this engineering well, we’re going to spend in an unlimited way and deal with that by creating debt that won’t ever be paid back, and we will risk losing the reserve currency status of the dollar. If we get into that position — and we’re very close — things will get much worse because we are living on borrowed money that’s financing our consumption.”

On Dollar as the World Reserve Currency

Dalio says we could see the US lose reserve currency status as soon as the next five years.

“Within the next five years you could see a situation in which foreigners who have been lending money to the United States won’t want to, and the dollar would not be as readily accepted for making purchases in the world as it is now.”

“The United States doesn’t have a good income statement and balance sheet in dealing with the rest of the world. It is running a deficit to the rest of the world that is financed by borrowing money so that we are producing liabilities.”

There is uncertainty in the markets ahead of the November election. With this, Dalio says there are two steps investors can take to protect their wealth.

“First, worry as much about the value of your money as you worry about the value of your investments. The printing of money and the debt should make you aware of that. That’s why financial asset prices have gone up — stocks, gold — because of the debt and money creation. You don’t want to own the thing you think is safest — cash.”

“Second, know how to diversify well. That includes diversification of countries, currencies and assets, because wealth is not so much destroyed as it shifts. When something goes down, something else is going up so you have to look at all things on a relative basis. Diversify well and worry about the value of cash.”

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Business

Fed Keeps Rates At Zero, Powell Says More Fiscal Support Needed

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Fed Keeps Rates At Zero, Powell Says More Fiscal Support Needed

The Federal Reserve wrapped up its last meeting before the November elections. It announced that it would keep rates at essentially zero until at least 2023. This serves as a signal that it doesn’t see inflation as an issue at all for the foreseeable future.

Fed Chairman Jerome Powell said, “We’re going to continue to monitor developments, and we’re prepared to adjust our plans as appropriate.”

“With inflation running persistently below this longer run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved,” the Fed’s post-meeting statement said.

Uncertainty and the Stock Market

However, the Fed’s latest projections have core inflation staying below their 2% target until 2023. This leaves many observers unsure of the Fed’s actual plan to spur the inflation they desire. This uncertainty caused the stock market to drop after the announcement.

“He noted that targeting an inflation overshoot for ‘some time’ as the statement says, means that they are not targeting a ‘sustained’ overshoot. So how long is ‘some time’ if it isn’t sustained?'” asked AB economist Eric Winograd. “That imprecision is a problem that the committee is going to have to solve to reap the full benefits of the framework shift. It’s not a coincidence that the stock market, which had been in positive territory, flipped negative after the chair’s comments.”

“He’s the great and powerful Oz. Investors got duped. They thought enhanced forward guidance meant something, but when they peeked behind the curtain they realized the Fed didn’t do anything, and the market rolled over,” said Michael Arone, chief investment strategist at State Street Global Advisors.

Jon Hill, a senior fixed-income strategist at BMO, added “This is dovish – lower rates for longer, higher equities, weaker dollar. The Fed is saying we’re not hiking in 2023, maybe in 2024 … What they’re saying is these are our goals. We expect to have just barely met them and even then, they’re not raising rates.”

Stimulus and Economic Recovery

Stepping ever-so-slightly into the political realm, Powell said that Congress should pass another stimulus package to support the economic recovery. He then identified unemployment aid, small business relief and funding for state and local governments as three key areas.

“More fiscal support is likely to be needed,” Powell said. “The details of that are for Congress, not the Fed.”

Republicans have repeatedly stated that they won’t provide additional funding to bailout poorly managed cities and states as part of any additional stimulus bills.

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