It's a phenomenon that simply shouldn't exist - one that manifests itself in weird, almost comical ways...
Borrowers are being paid to take out loans and mortgages... Imagine your account balance dropping in value as the bank "taxes" you each month for the "privilege" of keeping your money there.
And yet it's real. Very real: Negative interest rates are already in effect in at least eleven countries. As of the end of August 2019, an unfathomable $17 trillion in global debt was under a negative yield regime.
This isn't confined to fourth-tier economies, either. Several of those are among the world's largest, most advanced economies - like Germany, Japan, and France - where 10-year bonds trade with negative yields.
Incredibly, the total value of negative-yielding bonds is expected to keep rising as central banks keep pushing rates lower.
It's an experiment that will end badly.
Large banks are struggling, unable or unwilling to pass on those negative rates to their clients.
Meanwhile, odds are growing rapidly that America will be the next major economy to institute a negative interest rate policy (NIRP)... and all the negative effects and capital destruction that come with them.
Ultimately, hundreds of millions of investors will be victimized by this dubious practice.
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The Many Dangers of a Currency War
The odds are growing every day: NIRP is coming to America.
The U.S. Federal Reserve is looking ahead to the next recession or financial crisis and taking stock of the "ammo" at hand to fight it.
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It's been floating trial balloons and researching the idea. And the markets are pricing this in.
The European Central Bank introduced negative rates in 2014 in order to stimulate the economy. That was followed by the Bank of Japan, which did the same in 2016 to weaken the yen, as it was spiking and hurting exports.
On some level, pushing rates into negative territory can weaken a currency as investors flee for higher-yielding ones. But when no one wants a strong currency that hurts exports, it's not long before others use the same tactic and the benefits dissipate.
That's a currency war - a "beggar thy neighbor" policy - that becomes a downward spiral engulfing many.
The other goal of negative rates is to try and get savers to save less and spend more as they face the prospects of negative returns on deposits. You'd think if low rates stimulate economic growth, negative rates should do the same - but on steroids.
And yet like many harebrained policies, negative rates have unintended consequences. In some cases, as customer deposits shrink or accounts are closed altogether, banks actually make fewer loans, and the economy contracts. Bank profits take a hit, and share prices drop.
Banks need to attract deposits, which in turn allows them to fund new loans.
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A recent paper titled "Negative Nominal Interest Rates and the Bank Lending Channel" by researchers at Harvard University, Brown University, and Norges Bank of Norway determined that negative rates have these very effects. They examined the policies of Sweden's central bank, the Riksbank.
The paper states, "Using daily bank level data, we document that once the deposit rate becomes bounded by zero, interest rate cuts into negative territory lead to an increase rather than a decrease in lending rates... A calibration which matches Swedish bank level data suggests that a policy rate of -0.50% increases borrowing rates by 15 basis points and reduces output by seven basis points."
Another unintended consequence is currency hoarding. Rather than spend their money before negative rates take their bite, people begin to save even more and spend less capital. As they focus on their goals of retirement, a home purchase, or tuition, savers double down by saving even more. The real effect is deflation, which is the exact opposite of the inflation central bankers want.
Five years of negative rates have hurt European banks. In fact, they have been desperate to avoid passing those on to most retail clients, which is something corporate clients haven't been so lucky to escape. At the same time, these institutions are clamoring for ways to replace lost revenue.
Euro-area banks already pay over 7 billion euros annually just to leave funds on deposit with their central bank. In many cases, that's pushed their share prices to record lows thanks to falling revenue and profits.
Your Golden Opportunity amid All This Negative Yield
The Eurodollar futures market is used by larger market participants to hedge U.S. interest rates. It's a highly liquid market companies use to protect against interest rate risk if they have exposure to dollar-based financing agreements.
This market currently has large bets we'll see zero or negative U.S. interest rates within the next two years.
As JPMorgan Chase & Co.'s (NYSE: JPM) head of U.S. interest rate derivatives strategy recently told The Wall Street Journal, "People are trading things that imply negative rates are not just possible but reasonably probable... The market's willingness to price in negative rates has gone up significantly."
The San Francisco Fed recently published a paper titled, "Yield Curve Responses to Introducing Negative Rates." Its main conclusion was that with rates already so low in so many developed nations, negative rates could be seen as a vital tool for the Fed in the next recession. Never mind that the actual experience has shown the opposite results.
That could mean negative-yielding Treasuries in addition to the $17 trillion in negative-yielding sovereign bonds already held worldwide.
Consider that those bondholders already worry that rates could drop further. As a result, they're ready to plow their cash into bonds that promise to pay them back less than their original capital 10 years later.
After cutting for the third time this year, the Fed rate is already down at 1.5%, and that's in a supposedly healthy economy with employment at record lows.
"We would need to see a significant move up in inflation before we could consider raising rates," Fed chairman Jerome Powell said during the press conference that followed Fed's October interest rate announcement. That suggests once inflation arrives, it could run hot for some time.
Gold reacted well to those comments, rising back above $1,500 to regain its 50-day moving average. With falling U.S. rates and negative rates across much of the world, gold's lack of yield is becoming less of an opportunity cost with each passing day.
In fact, the World Gold Council recently suggested that flat to inverted yield curves, high stock valuations, and a clear shift by central banks to an easy money policy favors gold. They proposed that gold could become attractive and a better diversifier than bonds, allowing for higher portfolio allocations.
Given the inherent risks of extremely low bond yields in the United States and negative yields in so many other parts of the world, gold's looking especially attractive. Central banks would know: they're buying gold at the highest rate in 50 years.
A simple way for retail investors to buy gold exposure is through the Sprott Physical Gold Trust (NYSE: PHYS). It holds gold bullion that is fully allocated and stored at a secure third-party location in Canada, subject to periodic inspections and audits.
What's more, U.S. investors holding for at least 12 months can benefit from a 15% capital gains tax versus the 28% rate with most precious metals ETFs.
If you're just looking to maximize the yield on your cash, consider the BMO Harris Platinum Money Market. If you meet the $5,000 minimum deposit, you'll earn just over 2%, for now.
I suggest you take full advantage of those kinds of yields while they're available, because even the Fed's telegraphing that negative rates are on the horizon.
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