Race to the Bottom Gaining Traction: Negative Rates Amplify Currency Wars
By: Sol Palha
"Ability is a poor man's wealth."
~ M. Wren
If you had told individuals before 2009 that we would be living in a negative rate environment in the near future, most would have treated you like a lunatic that just escaped from Ward 12.
Fast forward a few years and viola, bankers all over the world are embracing negative rates.
China devalued the Yuan once again, adding further fuel to the already blazing fire. The Fed will have no option but to lower rates and then Jump onto the negative rate bandwagon. Don't listen to the nonsense the Fed has been mouthing for months that all is well. We can already see the all is good slogan breaking down to "it's not as good as we thought" slogan; this will eventually change to "oh my God it's darn right ugly out there" and we need to lower rates to prevent a catastrophe slogan. The same strategy has been used again and again; it works marvellously so why stop now. The masses like Pavlov's dogs have been trained very well, so there is absolutely no need to change the game plan. Keep the lie simple, repeat it over and over again and the masses will swallow it hook line and sinker. Crowd psychology clearly illustrates that the mass mindset is self-destructive; individuals with this mindset claim they are looking for something better but their actions speak otherwise. We will cover this issue in more detail in a separate article.
The first experiment was to maintain a low rate environment; the second one was to Flood the system with money; this was achieved via QE. The third phase was to get the corporate world in on the act of flooding the markets with money. This was achieved through massive share buyback programs. The next stage is to introduce negative rates to the world to fuel the mother of all bubbles; this program is currently underway.
Central bankers are aware that people will save more and more due to fear; uncertainty is a great catalyst and moves a person from state of calm to a state of panic rather rapidly. They know that many will continue to remain wary even when banks start charging them a fee to hold onto their money. People are saving more and more because of uncertainty; they don't know what the future holds, so they save even though it means taking on a loss. Experts will state that central bankers miscalculated, but the truth is that they did not miscalculate; this event was planned years in advance and with meticulous precision. Watch with surprise how the rate hike slogan will fizzle into "the cut the rates slogan"; Yellen already sounds more dovish with the passage of each day.
Many experts have stated that negative rates are a bad idea; this is true to a degree, but it depends on the angle of observation. If you sit down and take no action, then the response is "yes they are terrible". However, if you are proactive, you can use negative rates to your advantage. For example, this family is getting paid interest on their mortgage instead of paying interest to the bank. In other words, they are getting paid to take a mortgage.
Stock markets will trend higher
Cheap Money leads to speculation, and the stock market is the best place in town to speculate.
Expect corporations to borrow even more money and use these funds to buy back their shares thereby artificially boosting EPS. There is no shred of decency left in Wall Street and as corporate officers bonuses are tied to performance. These chaps will do whatever it takes to boost share prices, even if it means creating an illusion that earnings are rising, when in fact, they could be flat or even dropping. All they want to do is make a killing; they could care less about the small guy. It's easy, and Congress has deemed it to be legal, so there is nothing to stop them and everything in place to encourage this behaviour. We covered this topic in detail several times, over the past 12 months and repeatedly stated that the every pullback was to be viewed as a buying opportunity.
Property prices will rise
Negative rates will lower the cost of mortgages and in many cases; individuals will receive a check from the banks for interest payments on the mortgage. Negative rates are already fuelling a property bubble in Sweden, and real estate prices have surged significantly in the U.K; it's a matter of time before we experience the same phenomenon in the U.S. Bankers will almost certainly lower lending standards in the US; Barclays Bank has recently announced 0% down mortgages.
While such a proclamation appears insane, the chart below clearly reveals the opposite to be true. Negative rates do create the illusion that the economy is improving, and the masses seem to agree silently.
Denmark's GDP started to rise, and that is and was the whole purpose of the program. Note that shortly after the crisis of 2008-2009; rates were pushed lower faster than at any period before in the last 20 years; the lower they dropped, the higher the GDP; in fact, one can conclude that it's in an uptrend.
China's decision to devalue on the Yuan clearly illustrates that the "devalue or die" program is being embraced worldwide. Nations will continue to devalue their currencies in a bid to stay competitive; the global economy is weak and only hot money is creating the illusion that all is well. Mass psychology indicates that the masses love to be told a sweet lie as opposed to the blunt truth. In that sense, they will get what they secretly desire, a market that looks magnificent from the outside but is rotten to the core from the inside. As we have yet to embrace negative rates, there is a lot more upside left in this market. This market is not going to soar higher because of fundamentals; fundamentally speaking this market should be in the toilet. It will soar higher because of hot money. We expect property prices to continue trending upwards in the US and eventually when lending standards are lowered; we expect another property bubble to unfold. Regarding the stock market, the sentiment is negative, and a lot more money will flood this market once negative rates are here. The stock market will most likely continue trending higher, but don't expect it trend upwards in a straight line. Traders should be prepared for wild swings in both directions.
"The way of paradoxes is the way of truth. To test Reality we must see it on the tight-rope. When the Verities become acrobats we can judge them."
~ Oscar Wilde