Negative Interest Rates Coming Soon
Peter Sayles |
Christine Lagarde – head of the International Monetary Fund (IMF) – is set to become head of the European Central Bank (ECB) when Mario Draghi hangs up his shoes.
Her tenure as IMF chief isn’t filled with much. The handling Greek debt crisis in 2012 was a disaster (we won’t go into too much detail here.) But aside from that, Lagarde’s course has been relatively steady.
She now gets the job of ECB chair. She has big shoes to fill. And it doesn’t look like she’s going to disappoint.
Draghi’s famous “whatever it takes” speech is (and will) define his career. He claimed these words to defend the euro when the continent was on the brink of collapse… Draghi dropped interest rates to zero/negative and then started buying hundreds of billions of bonds both corporate and sovereign.
There’s now $12 trillion in negative interest rate bonds around the world – mostly in Europe and Japan.
“Today, half of all European government bonds have a negative yield, with the total amount outstanding at €4.4 trillion ($5 trillion), compared to €3.3 trillion at the end of January, according to data from Tradeweb. At the end of May, 20% of European investment-grade corporate debt had negative yields.” (Source: Quartz)
This is one of the most insane tools in the central banks toolshed. And it’s going to ruin the global economy.
Think about it. A world where you get paid to borrow money. Yeah… citizens of Denmark are getting paid on their mortgage.
(To all our U.S. subscribers… screw the politicians for talking about clearing our debt. Let’s get them to pay us for having it in the first place! Who’s with us?)
The intended and unintended consequences of this are massive.
It’s also perverting the stock market. Major companies can borrow billions of dollars at 0% interest. Then turn around and repurchase its shares to boost profits. Or make billion dollar acquisitions with no real opportunity cost.
All of this for what? To produce an arbitrary number of inflation? We’ve been told by central bankers around the world 2% is the magic number. But has anyone asked why?
Has anyone told us what 2% achieves? Why do us – the consumers – want inflation? Why do we want to pay 2% more for groceries, movie tickets, health care, etc…? That’s what inflation is – an increase in the money supply which pushes up prices.
These negative rates certainly haven’t helped Europe at all. Look at the stock markets around Europe. All of them are stuck in the mud or down. Yet companies’ debt balances are through the roof.
So the question is… who is this benefitting?
Now Europe gets to welcome Lagarde.
Here was Lagarde’s opening comments about the negative interest rate expirement over the past few years (emphasis added):
“We see the recent introduction of negative interest rates by the ECB and Bank of Japan —though not without side effects that warrant vigilance—as net positives in current circumstances.”
We’d love to see what net positive she’s talking about.
But we digress. The point is Lagarde sees negative interest rates as helpful to the European economy.
Europe isn’t growing and it’s not in recession yet. Where do you think rates are headed when they are in recession? Further negative is our guess.
We think the U.S. is on its way back to zero-bound too. And then some.
Fed bankers are already talking about it – openly. They don’t even care anymore. They’re telling us it’s coming. Whether we like it or not.
Stay tuned on how we’ll use that to profit in the MightyTrades portfolio…