Race To The Negative-Rate Bottom

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. Fast forward a few years and voila, 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'. And that will eventually change to the slogan: 'it’s ugly out there' and we need to lower rates to prevent a catastrophe. The same strategy has been used again and again; it works marvellously so why stop now. The masses have been well trained so there is absolutely no need to change the game plan. Keep the lie simple, repeat it over and over and folks will believe it. Crowd psychology clearly illustrates that the mass mindset is self-destructive.

The first experiment was to maintain a low-rate environment; the second was to flood the system with money, which 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, which is currently underway.

Central bankers are aware that people will save more and more due to fear. Uncertainty is a great catalyst, moving one from a 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 their money. People are saving more because of uncertainty; they don’t know what the future holds, so they save even though it means taking 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 transforms into 'cut interest rates now'. Yellen already sounds more dovish with the passage of each day.

Many experts have said that negative rates are a bad idea, and that's true to a degree. But it depends on the angle of observation. If you take no action, then the response is 'yes, they're terrible'. However, if you are proactive, you can use negative rates to your advantage. For example, one family gets paid interest on its mortgage instead of paying the bank. In other words, they're getting paid to take a mortgage.

Stock Markets Will Trend Higher

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Cheap Money leads to speculation and the stock market is the best place 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 on Wall Street where 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. We've covered this topic in detail over the past 12 months, saying that every pullback is to be viewed as a buying opportunity.

Property Prices Will Rise

Negative rates will lower the cost of mortgages as, in many cases, holders receive a check from their bank for interest payments. Negative rates are already fueling a property bubble in Sweden and real estate prices have surged significantly in the U.K. It’s only a matter of time before the same phenomenon occurs in the U.S. where banks will almost certainly lower lending standards. Barclays (LON:BARC), for example, recently announced 0%-down mortgages.

Improving GDP

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, which was, of course, the whole purpose of the program. Note that shortly after the crisis of 2008-2009, rates were pushed lower faster than at any period prior to the last 20 years -- the lower they
fell, the higher the GDP. In fact, one can conclude that it’s in an uptrend.

Game Plan

China’s decision to devalue its 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 prefer a sweet lie as opposed to the blunt truth. In that sense, they will get what they desire -- a market that looks magnificent from the outside but is rotten to the core. As the U.S. has yet to embrace negative rates, there's a lot more upside to this market (no thanks to fundamentals). Indeed, fundamentally speaking, this market should be in the toilet. It will soar higher because of hot money. We expect property prices to continue trending up. And as lending standards are relaxed we expect another property bubble. As for the stock market, the sentiment is negative because more and more cash will flood the market once negative rates arrive. While the stock market is likely to trend higher, don’t expect it to do so 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