Negative Rates Embraced by Traders Whistling Past the Graveyard

There is over $16 trillion in negative-yielding debt around the globe. What a sick world. The Federal Reserve and other global central banks have destroyed all price discovery and the business cycle over the last decade with their obscene Keynesian spending. The Fed members coo dovishly sending stocks higher year-after-year. Investors expect the party to never end.

Fed officials remain loyal to the Wall Street investment banks since they will receive a quid pro quo when they leave public life (lucrative speaking fees for appearing at token luncheons). Such is the crony capitalism system in America. Unfortunately, the central banker money-printing schemes only serves to make the wealthy filthy rich at the expense of the common population (one-half of Americans do not own a single share of stock).

The accomodative central banks continue pushing yields lower at the same time that aging populations are seeking safe investments (buying notes and bonds sending prices higher and yields lower). As Roy Rogers would quip, "I'm not looking for a return on my money, I'm looking for return of my money."

In essence, with negative rates, such as in Switzerland, the world's wealthy are paying for the privilege to park their money in the Alps. Interestingly, the wealthy class has raped the global financial systems for all its worth over the last decade and are willingly stashing money in negative-yielding instruments. If you were handed big money on your stock holdings over the last 10 years due to the central banker largess, why not cash out of equities and stick the dough in a safer place even if you pay a few shekels for that opportunity? This is the way the wealthy think.

Japan, Germany, Switzerland and many other nations are sporting negative rates for the 10-year yields as well as other maturities. Germany is pulling the US yields lower. Former Fed Chairman Greenspan, who created the housing bubble that popped in 2007-2008, says 'it is only a matter of time before negative rates appear in the US' according to a CNBC interview.

Global traders and investors are whistling past the graveyard saying negative yields can go on forever. They throw economic textbooks in the garbage, especially since there are no chapters written on negative rates, but proclaim that the negative rate conundrum can go on forever.

Typically, the negative rate payout is nullified by fees (the bank is not really losing anything since they cover any payouts with fees charged to the customer; this is why the Denmark negative mortgages can be offered).

In its basic form, with negative rates, you are paying for the storage of your money. Instead of receiving interest on your money, you pay to maintain the dough in a perceived safe place. Is there an end game to negative rates? The amount of negative-yielding debt around the world keeps increasing a trillion every week or two but will it ever come to an end?

Thinking about storage, a million dollars, in one hundred dollar bills, can fit in a suitcase. A $100 million is the size of a pallet say 4 feet on each side which is 64 cubic feet (1.8 cubic meters). Thus, a person, or institution, could take their money, and instead of placing it in a negative-yielding instrument, simply bury it in the ground. A suitcase would be easy to bury. Let's say it is at a location where someone is always there, 24/7, 365 days per year, so any attempt by a thief to dig up the money would be futile. The only cost incurred would be to properly wrap and seal the money and the excavation cost for Frank to bring his backhoe in and dig the hole, which happens to be right next to the graveyard by coincidence.

If you think about this scenario, negative rates will hit a brick wall end game; they cannot go on forever since investors will be better off to simply bury their own money. The cost of storage in a hole in the ground would equal the cost of negative-yielding debt. Isn't it bazaar that future investing could involve burying money underground, or under the mattress for folks not as well off? Negative rates do go hand and hand with money hoarding and a disinflationary and deflationary vibe.

So there is a finite end game ahead for negative-yielding debt; it is only a matter of price (yield) and that is when the cost of packaging and burying your money becomes equivalent to the negative rates offerings. In the future, governments may have to ban cash or at least deter the use of cash.

In the crony capitalism system, the central bankers have destroyed the financial systems to defend the wealthy's assets and in turn receive their own piece of the financial pie at a future date. Humans are corrupt animals. Negative rates must be one of the scenarios that play out when crony capitalism is in its death throes.

The goofiness in social media, the Facebook follies, the Twitter tweets, the rampant narcissism in society and the need for people to claim their 15 minutes of Andy Warhol fame, are analogous to ancient Rome and the bread and circus days. Just as the Romans flocked to the Colosseum to watch the bloody display of human battle and sacrifice, so does the modern world flock to social media platforms destroying each other mentally and emotionally. Words can cut far deeper than knives; you can heal from a knife wound.

So the fun and frolic continues. Society is fat, dumb and happy. The central bankers maintain their thumb on the scales and walk hand and hand with the investment banks, corporate executives, politicians and America's wealthy privileged class all whistling past the graveyard proclaiming that negative rates can continue indefinitely.

Note Added Friday Morning, 9/6/19: Talking in Europe with Bloomberg, about negative rates, former ECB Vice President Vitor Constancio cautions about further deepening of negative rates. Constancio says, "Negative rates should not be over-used." He says there may be a little tweaking room remaining for negative rates but in general thinks the move to negative rates has ran its course and the rates should not be directed any more negative (an admission that negative rates have a finite end).