Negative interest rates are spreading like a plague.
As you’ve probably heard by now, many interest rates around the world have “gone negative.”
Normally, you earn interest on the money in a savings account. With negative rates, you pay the bank to hold your money. In other words, negative rates turn savings upside down. They basically “tax” the money in your account.
Negative rates were unheard of for most of history. But, as you’re about to see, they’re starting to take over the world.
In this issue, we’ll tell you exactly what’s happening…and what to do about it.
• The European Central Bank (ECB) started using negative rates two years ago…
The Bank of Japan (BOJ) introduced them earlier this year. Denmark, Sweden, and Switzerland have them too.
Today, $10 trillion worth of government bonds pay negative yields. That’s up from $6 trillion in February, a staggering 67% increase in just four months.
The Wall Street Journal reported today that government bond yields in Japan, Germany, and the U.K. have just fallen to record lows.
• Negative rates have even seeped into the corporate bond market…
At least $36 billion worth of corporate bonds have negative rates.
Iconic American businesses Johnson & Johnson (JNJ), General Electric (GE), and Philip Morris (PM) all have bonds trading with negative rates. So if you buy a Johnson & Johnson bond today, you’re essentially paying a fee to lend the company money.
• Central bankers said negative rates would “stimulate” economies…
The idea is that folks will spend more money if you “tax” their savings. According to mainstream economists, this will grow the economy.
It hasn’t worked.
Europe and Japan are both growing at their slowest rates in decades. Their stock markets are also doing poorly. The STOXX Europe 600, which tracks 600 large European stocks, is down 12% over the past year. The Nikkei 225, Japan’s version of the S&P 500, is down 16% since last June.
• Negative rates have backfired…
Folks aren’t spending more money. They’re hoarding cash to avoid paying negative rates.
In Japan, sales of home safes have skyrocketed. According to Business Insider, safe sales are now at the highest level since the 2008 global financial crisis.
Europeans are doing the same thing. Business Insider reported last week:
“Safe sales have shot up through the roof in Europe,” said Hickmore [portfolio manager at Aberdeen Asset Management]. “People are taking cash out, and even with security costs, it's better returns than your negative rates. It's crazy, crazy behavior.”
• Huge corporations have also gone to extreme lengths to avoid negative rates…
German insurance giant Munich Re recently pulled €10 million ($11 million) from its account with ECB.
Munich Re is the world’s second-biggest “reinsurer.” It insures insurance companies.
Like other large European financial institutions, Munich Re keeps money with the ECB. This arrangement used to make sense. Not anymore.
These days, Munich Re has to pay €4 for every €1,000 it stores with the central bank for a year. That’s because the ECB’s key rate is currently -0.4%. That might not sound like much. But for Munich Re—which oversees about €231 billion—it adds up quickly.
Munich Re put the money it withdrew into other currencies and gold.
• This week, one of Germany’s largest banks said it might soon do the same thing…
Reuters reported on Wednesday:
Commerzbank, one of Germany's biggest lenders, is examining the possibility of hoarding billions of euros in vaults rather than paying a penalty charge for parking it with the European Central Bank.
The company made the announcement one month after it said negative rates were eating into earnings. Its profits fell 52% during the first quarter.
Commerzbank would become the first major European bank to take this step. We don’t think it will be the last. According to the Financial Times, negative interest rates cost German banks €248 million last year.
• Negative rates are eating Europe’s banks alive…
Spanish banking giant BBVA’s (BBVA) profits fell 54% last quarter. First-quarter profits at Deutsche Bank (DB), Germany’s largest bank, were down 58%. Swiss bank UBS’s (UBS) profits plunged 64%.
Last week, Deutsche Bank's CEO said it could continue to struggle as long as negative rates are in place:
In the banking world, we are currently struggling with negative interest rates.
We will struggle more as the effect of those negative interest rates plays out into our deposit books.
European banks are now trading like they’re in a financial crisis. Deutsche Bank’s shares have plunged 41% over the past year, and they’re down another 5% today as we write. BBVA is down 37% since last June. UBS is down 25%.
• Low interest rates are destroying the value of paper currencies…
The value of Europe’s currency, the euro, has fluctuated 25% since the start of 2014. The Japanese yen’s value has swung 20%.
These are huge price swings for major currencies. Remember, we’re talking about the value of money in people’s wallets, not volatile biotech stocks. These wild swings directly affect anyone with a bank account.
• This is setting the stage for a major financial disaster…
And the best way to protect yourself is by owning physical gold.
Gold is real money. It’s held its value for centuries because it has a unique set of qualities: It’s durable, easily divisible, and easy to transport.
And unlike paper currencies, gold has intrinsic value. It will retain its worth no matter how recklessly world governments act.
As negative rates continue to destroy paper currencies, gold’s value should skyrocket. That’s because it’s a safe haven that’s preserved wealth through stock market crashes, economic depressions, and even full-blown currency crises.
If you do one thing to protect yourself from the “grand monetary experiment,” own physical gold. For other ways to protect yourself, watch this short free presentation. By the end, you’ll understand why crashing currencies are a sign of a much bigger problem. Click here to watch this free video.
Chart of the Day
Rock-bottom interest rates have changed how companies spend money…
As you probably know, the Federal Reserve has held its key interest rate near zero since 2008. Like the ECB and BOJ, the Fed cut rates to “stimulate” the economy.
Eight years of near-zero rates encouraged companies to borrow huge sums of money. Since 2007, U.S. corporations have borrowed nearly $10 trillion in the bond market. Last year, they borrowed a record $1.5 trillion.
The Fed slashed interest rates to encourage borrowing and spending. So, in a way, it got what it wanted. The problem is that companies borrowed money for the “wrong reasons.”
Today’s chart shows how much U.S. corporations have increased spending on share buybacks, dividends, and business investment since 2009. A share buyback is when a company buys stock on the open market. Business investment includes spending on machinery and equipment.
You can see spending on buybacks has nearly tripled since 2009. Spending on dividends increased 67%. Business investment rose just 44%.
Companies can boost their share prices by paying dividends and buying back stock. But the benefit is usually short-lived. That’s because neither actually helps a company grow its sales or profits. Buybacks just make profits look bigger “on paper.” And eventually, the “high” wears off.
If you want to own stocks, avoid expensive ones and stocks that have been bid up by share buybacks. We also encourage you to set aside extra cash and own physical gold.
Delray Beach, Florida
June 10, 2016
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