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We're living in crazy economic times.
The race to debase and stimulate has taken us into uncharted financial waters.
Zero interest rate policies (ZIRP) are being replaced with negative interest rate policies (NIRP).
It's an upside-down banking environment that presents some serious challenges.
But investors who are willing to get just a little creative can profit nicely, even as others lose money that just sits there.
And, even better, the shares are trading at an 8% discount now…
"Financial Repression" Is the New Reality
Until a few years ago, few of us had ever heard the term "financial repression." Today, we're all living it.
Things are now so backwards that some are being paid to borrow money, while others are paying to leave their funds on deposit.
In Denmark, entrepreneur Eva Christiansen applied for a small business loan. When her bank called with news that her financing was approved, they informed her the interest rate was -0.0172%. That's a negative interest rate. Incredibly, it means Christiansen will be paid to borrow money.
To be sure, that was a pleasant surprise. But the obverse of this coin is decidedly less bright.
Also in Denmark, student Ida Mottelson, vying for her master's degree in health sciences, was contacted by her bank. In her case, she was told she would have to pay a 0.5% fee to leave her funds on deposit. She's now looking for another bank to do business with.
This backwards treatment goes beyond personal banking, too.
Just recently JPMorgan Chase & Co. (NYSE: JPM) decided it would soon start charging large institutional clients on certain deposits.
Hedge funds, foreign banks, and private-equity firms will be most affected. JPMorgan is reacting to new federal rules which discourage banks from holding deposits considered at risk of fleeing when financial stresses or crises present themselves.
Must Investors Take a Loss for Safety?
Europe appears to be the epicenter of this NIRP phenomenon.
Already Switzerland, Sweden, and Denmark foist negative interest rates on some bank deposits.
Australia's Commonwealth Bank estimates close to 25% of worldwide central bank reserves now carry a negative yield, meaning they're losing money on those funds.
Germany just issued $4 billion worth of five-year bonds paying a negative interest rate. Some investors have gotten so desperate for safety; they're willing to accept less than their full capital back after five whole years. Others are buying those bonds, betting rates will go lower still, and pushing bond prices up in the process.
In places like the Netherlands, France, Belgium, Finland, and even Italy sovereign bonds are being issued with negative yields.
As crazy as it sounds – and it is pretty crazy – it's a result of central bankers desperate to stimulate spending in an effort to boost inflation. Plain and simple.
And it's having some serious unintended consequences.
The Swiss National Bank's introduction of negative interest rates could bring dire consequences to Swiss pensions, according to UBS.
Lukas Gähwiler, head of UBS Switzerland, said "It is at least as serious for the economy as ending the floor to the euro, and could even be more serious." His bank's analysis concluded negative rates could weigh on the real economy, cause interest rate risks, compel banks to consolidate, and lead to severe consequences for pension funds, both government and private.
To wit, pension funds restricted from risky investments are in danger of becoming progressively underfunded. The only remedy may be resorting to hikes in contributions. Old age pensions are going to see funding gaps widen even further.
Believe it or not, these shenanigans could go on for a while yet.
I say that because, according to James McAndrews of the Federal Reserve Bank of New York, economists estimate the limit is when interest rates hit -0.5%. Beyond that level they figure depositors may begin to withdraw their funds and sit on physical cash instead.
Yet a 2012 study by the European Central Bank estimates the cost of private cash transactions is 2.3%, pointing to a possible tolerance for even lower rates.
But at some point, rather than pay to park their money, people and businesses will prefer to withdraw their cash and sit on it. If we do indeed get there, that could mean a great business opportunity for secure cash storage services.
Sidestep NIRP with This Investment
About the Author
Peter Krauth is the Resource Specialist for Money Map Press and has contributed some of the most popular and highly regarded investing articles on Money Morning. Peter is headquartered in resource-rich Canada, but he travels around the world to dig up the very best profit opportunity, whether it's in gold, silver, oil, coal, or even potash.
I'd love to buy it, but when will I know it is prudent to get out? I know nothing about bonds. I would not know when…
Hi Edith,
Thanks for your comment. If I owned it, I would use a trailing stop of about 8%, which is slightly more than the current yield, but also relatively low because the shares are not that volatile.
Not volatile at all, with a – beta, Great call Peter!!!!!!!!
JANET YELLEN DOESN'T WANT TO BE THE FAT LADY
Negative rates creates a number of "bubbles", with capital rotation determining which asset classes are getting a bit bubbly. After six years of zero interest rates, just about every asset class and possible investment, including real estate, has been inflated. Real demand may not be sufficient to keep all these assets at current levels without some kind of eventual correction.
There are many similar concerns about this amongst a number of smart investors, both individual and institutional. Everyone seems to agree it " won't end well". On that basis alone, I predict Janet Yellen won't take any chances on her watch ( She won't want to take the role of the Fat Lady and start singing).
As far as storing your wealth outside a bank in cash for free, well, it may be just as effective to convert it to gold coins or bullion and store the bullion securely in anonymous non-bank segregated accounts. Nothing is completely secure, but large amounts of cash in the average house ( "under the mattress" ) is just asking for trouble.
Criminal types ( repeat offenders) eventually find out ( they have ways) where the stash is located and would not be deterred from attempting an armed home invasion if they think there is enough cash inside to be worth their while. If you keep lots of cash on premise, then you are effectively "baiting the trap". If so, then better arm yourself and be ready for a fight. I ask: Why take the risk??
Remember, Armored Cars drivers and guards have been murdered on route when they step out of the truck in a parking lot ( Henderson, Nevada ) and armed thugs are lying in wait with automatic weapons. Outgunned every time. They take-over the truck and all the cash. Its happened before and someone is always trying to get a armored truck if the driver is careless and ignores security protocols ( keeping the bulkhead door locked at all times).
CASH IS NOT TRASH; NEITHER IS GOLD
Convert your surplus cash wealth to gold and store it securely. Put it on hold until things normalize. Eventually, they must. Gold will hold its value over the long term when other markets correct or decline in value, including cash. In addition, it always pays to diversity your risks.