So if rates go negative...what to do?

Discussion in 'Finance and Investment' started by Balls on the Line, Feb 8, 2019.

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So if rates go negative...what to do?

  1. Buy FAANGs

    2 vote(s)
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  2. Buy rental units

    2 vote(s)
    66.7%
  3. Drop off the grid Kaczynski style

    2 vote(s)
    66.7%
  4. Wait for Barsky-Summers effect to be allowed to manifest

    1 vote(s)
    33.3%
  5. Meet up at the barricades Gilet Jaunes style

    1 vote(s)
    33.3%
Multiple votes are allowed.
  1. Balls on the Line

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    So the IMF floats the idea recently of having currency bifurcated into cash and e-money with a negative interest rate. If somebody tries to hide cash under the mattress the conversion factor into e-money takes into account the negative yield. I guess, e-payment systems will really be encouraged so there will be little escape.

    Then today stories are being floated that the Fed is considering QE as a permanent tool.

    WTF? I don't want to be forced into the casino but if I have to lose 3% per annum on my Tbills or CDs, that's really going to frost my butt.

    It's one thing if Japan or Europe go negative especially if the option of a postive yield on US Tbills is an option, but if the US goes negative ( ECB already talking about firing up their QE again), then there will only be one option left.
     
  2. Raryn

    Raryn Infernal Internist / Enigmatic Endocrinologist
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    Eh. Not relevant today. We're at record low unemployment, excellent growth of the economy, and the Fed is still selling off their assets (call it "quantitative tightening") even if they're saying rates might not go up again this year.

    I think they have enough tools for when the next recession hits it won't be relevant then either. Unless we get another great financial crisis in the next few years, then I'll worry about what you're discussing.
     
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  3. OP
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    Actually we've been in crisis since August 2007. Only intervention has stabilized economies at a much lower output ( using a real deflator) in developed markets. The PBoC blew an unprecendeted credit bubble to maintain this "new normal." The official data touted in the media is fake news. Management of Perspective Economics...MOPE. If we go back to measuring U6 the way it was done prior to 1994 then unemployment is still above 20%. Has been since 2009.

    All you have to do is look about you when driving around and compare what you now see to what you remember 20 years ago. The economy is smaller. Real incomes have fallen. People are poorer.

    The crisis is becoming acute again despite intervention. Started in the emerging markets last year and will reach the core in a few months as evidenced by the chaos in France. Hence the Powell capitulation and bizarre QE in China with perpetual bonds. Even now the ECB will drop the pretense of halting asset purchases.

    Recall back in 2016 at Jackson Hole the trial balloons floated about how to deal with the next crisis? It was predicitve programming. Grooming the markets for their implicit consent for price controls.
     
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  4. Raryn

    Raryn Infernal Internist / Enigmatic Endocrinologist
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    :laugh:

    Fake news indeed. When I look around, I see more job listings than there are people looking for them. A "real" unemployment rate of 20% is laughably false. The only difference in U6 between 1994 and today is that those who haven't looked for a job in >1 year are no longer counted as unemployed - with a mean duration of unemployment in the 4-5 month range, those who are unemployed > 1 year are more or less irrelevant today. In particular, most of my friends and relatives have Bachelors degrees at least, a population with an unemployment down to the 2-3% range at most.

    Incomes are at an all-time high. Overall, wages have risen higher than the inflation rate. Not a lot higher, but higher. In fact, inflation has been amazingly stable over the last three decades. Yes - housing, healthcare, education, and childcare have become more expensive over time - but food, clothing, transportation, and most importantly technology are at record low prices for record quality products.

    The Chaos in France is SOP. They have country-shuttering protests or strikes practically yearly like clockwork. I'd be surprised if they managed to go three years without a riot.

    This is the second-longest expansion in the history of the country (the longest being 1990-2001) so I'm sure we'll have a recession in the next few years - but the fundamentals of our economy don't worry me in the least.
     
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  5. Mman

    Mman Senior Member
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    wow, not often we see the real tinfoil hats coming out there. Congrats. I mean if you are going to challenge me to look around in 2019 and compare it to 1999, well let's just say it's not even close. I'll just assume you either weren't alive in 1999 or certainly not yet an adult.

    Also worth noting that total work force participation is higher today than the median of the last 70 years no matter what convoluted way anybody wants to measure unemployment.
     
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  6. OP
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    Salvini just floated the end game solution and most don't realize the significance of what he's proposing. Eventually all the governments will have no choice but embrace this solution.
     
  7. Mman

    Mman Senior Member
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    LOL.

    He's more likely to get Italy kicked out of the EU than anything else he might want to accomplish. And no, "all the governments" will not be resorting to this.
     
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  8. OP
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    Yes, they will have to reconcile their books. Sovereign debt has become odious debt,

    “..the Bank of Italy has the third-largest central bank holding of gold reserves in the world after the US and Germany, owning 2,452 tonnes according to the World Gold Council, which at today’s prices would amount to just over $103 billion.

    Of course, even that amount pales in comparison with Italy’s total debt load of €2.35 trillion"

    What's wrong in that eqution? Numbers don't match up, right? Ah, but that's the key. You see at the end of a cycle a certain asset goes from being a market-based one to a political one. Whatever number needs to be assigned to this asset to balance the books is what it'll be.
     
  9. Mman

    Mman Senior Member
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    let me guess, you are about one post away from citing and linking ZeroHedge posts...amirite????

    Please don't be a sheep and let some loonies tell you what to think. Italy has many problems. For one, it's barely a country as many people there have far more allegiance to the old city states than they do to the recent country of Italy that has not been around for very long. It is also quite a problem when they have to issue debt in Euros but cannot print more Euros if they want to which is a problem unrelated to the US that issues debt in dollars and can print more if needed.


    If you want to stock up on gold, guns, and ammo, please feel free to do so. Just don't try to offer it as sound financial advice to physicians and medical students.
     
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  10. OP
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    You just made my point which is why the Euro will end up being the Deutsche Mark or a Nordic amalgamation of the surplus countries in the Eurozone. And yes, the US can never nominally default but what happens to the exchange rate if USG insists on printing to meet 100T in unfunded liabilities and BTW foreigners stopped accumulating USTs since 2014?

    [​IMG]
     
  11. Mman

    Mman Senior Member
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    LOL

    If you want to talk about the pros and cons and future of the EU and the Euro, I'm sure there is somewhere to do that. A finance and investment advice forum for med students/residents/physicians is probably not the place since it is irrelevant. You clearly are not educated on the topic, but that doesn't mean you can't have an opinion, just don't expect to find intelligent people wanting to read your ranting. I mean when you claim the US has been in a crisis since 2007 you aren't old enough or well read enough to understand our previous history.

    Can I expect a future rant on "fiat currency" and "fractional reserve banking" and gold? Because those rantings have come and gone on this forum since long before you started reading about it. I'm amazed you registered on this forum and instantly decided to spend such a high percentage of posts discussing something unrelated.

    edit: I'd be curious to see if your IP matched the banned account of Carol is Alpha who posted in the pharmacy forum and loved ranting on similar topics.
     
    #11 Mman, Feb 12, 2019
    Last edited: Feb 12, 2019
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  12. OP
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    KEN ROGOFF FEB 12TH 2019
    [​IMG]


    "More gold needed
    He is particularly concerned about the amount of gold held by emerging market central banks, suggesting they should increase their gold reserves by several percentage points.

    “Emerging market central banks should hold fewer dollars and more gold as a way of diversifying their portfolio. It’s a simple question of diversification. At the moment, most emerging market central banks hold 1–2% of their reserves in gold, with 70–80% in dollars and the rest in euros and other currencies. I think a 5% allocation seems a natural position to take as part of an effective diversification policy – although it could be higher. After all, the US share of the global economy is shrinking, power is being centralised and we don’t know what the future holds,” he says.

    Rogoff’s rationale is clear: the US dollar is increasingly dominant on the global stage yet US deficits are increasing and may well continue to do so.

    “The dollar is more widely used than ever. A growing chunk of European corporate bonds are in dollars, not in euros. Whenever Asian countries issue debt abroad, they do so in dollars. Reserves are in dollars and numerous goods are priced in dollars. So the dollar is more dominant today than under Bretton Woods – but that doesn’t mean it’s stable,” he says.

    “We already have trillion-dollar deficits right now and they’re manageable. But if corporate, local, state and federal debt is allowed to grow, there will come a point when the US gets stressed. And if deficits have doubled or tripled by then, inflation is bound to ensue. Our system is not built for high inflation so it would cause incredible financial turmoil and stress. It may take decades but these things always tend to blow up at some point. And, as the US economy becomes proportionately smaller and the dollarisation of the global economy becomes larger, the equilibrium becomes increasingly fragile,” he adds.

    Risk mitigation
    Against this backdrop, the rationale for holding gold becomes even clearer. “The point is, Treasury bills are not a riskless asset. They may be for two to three years but not necessarily for the long term, so if you want to build a 40-year plan, you should have some diversification. Let’s face it – if you’re a hedge fund manager and there is a 3–4% chance you will get wiped out and a 96% chance you will get very rich, that’s a bet worth taking. If you’re a country, that’s not such a smart bet,” Rogoff explains.

    As a hedge, gold has enormous value. So it makes sense for HNW individuals and even for some pension funds to hold a small percentage of their assets in gold. [you don't want to know how much pension funds have allocated to gold or miners...hint: it's below 1%]

    He believes that institutional investors and wealthy individuals should also allocate a proportion of their portfolio to gold. “As a hedge, gold has enormous value. You never know what’s going to happen and when something really bad happens, gold is probably going to be worth a lot to you. So it makes sense for high net worth (HNW) individuals and perhaps even for some pension funds to hold a small percentage of their assets in gold,” he says.

    Looking ahead, Rogoff suggests that gold is also likely to increase in value as its global role evolves. “I suspect gold’s value will go up in real terms. I think the trend towards digital currencies will strengthen the value of gold. As emerging markets expand and trust the US less, that will also strengthen the value of gold. So, as part of a larger portfolio allocation, it seems very reasonable to me,” he concludes." Ken Rogoff

    Aside: IMF studied what the best allocation would be for forex reserves and it found that 15% of reserves in gold was enough of a counterbalance for when real yields went negative. Of course, this means the LBMA and ESF would not be in the market dumping naked shorts during the most inactive hours of trading.
     
  13. FlowRate

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    Maybe someone will school me on this (not said sarcastically), but QE is such a cool sounding name for "inflationary flat tax."
     
  14. Raryn

    Raryn Infernal Internist / Enigmatic Endocrinologist
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    Let me know when inflation cracks 4%. Which it last did before I was even in kindergarten.
     
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  15. FlowRate

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    How would you say QE works, then? "Inflation" (are you referring to CPI?) is a complex end outcome which is heavily influenced by market volatility including expected "deflation" (by CPI) expected by price cuts when consumers save during a recession. The monetary base tripled following QE1+2 and the major holders of that cash are the large banks, but without a significant increase in fractional lending.
     
    #15 FlowRate, Feb 14, 2019
    Last edited: Feb 14, 2019
  16. Raryn

    Raryn Infernal Internist / Enigmatic Endocrinologist
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    QE stabilizes banks by increasing the money supply and encouraging them to make more loans - or at least, not make less loans.

    Deflation is deadly to the economy, so if QE raised the inflation rate (yes, as measured by the various forms of CPI) from -1% to 2%, I'm happy with that outcome. Inflation has been modest at best for more or less my entire lifetime and it's the feds job to keep it that way (with the second part of the dual mandate of shooting for increased employment).
     
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  17. OP
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    Dude, you really think inflation is what the BLS says? All the economic numbers are massaged to the point of being propaganda. It's all part of macroprudential financial repression. They have to inflate the debt away with negative real yields. Problem is, they can't even get nominal growth, let alone real growth, to exceed the growth in debt.

    [​IMG]


    Chapwood Index - The Real Cost of Living Increase Index Vs Consumer Price Index - Founded by Ed Butowsky

    Just in the last 6 years, I have had to spend 40% more to buy the same grocery items and that's with going to a discount store from a high end store and cutting back on animal protein.
     
  18. FlowRate

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    I have no argument with you on the outcome in terms of inflation as measured by CPI. But QE is by definition an inflation of the monetary supply which is handed only to for-profit financial institutions; its effect might still take years to fully develop when fractional lending finally increases in turn. It seems to me that your earlier point about a sound fundamental economy and the QE being sequestered in banks are major reasons we didn't have hyperinflation or deflation.
     
  19. Raryn

    Raryn Infernal Internist / Enigmatic Endocrinologist
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    So if I take the 500 items that are most commonly spent on by my social media friends, see at what rate their costs are going up without taking into account the fungibility of goods, and take a simple average, apparently inflation is 10%/year. Do you know how insane that sounds?

    For that to be anywhere near close to correct, that means that the US GDP has contracted by >25% in real terms over the last 5 years. That is, the nominal growth in GDP has been about 17% since 2014 - 10% inflation would imply that a 2014 dollar is worth about $1.6 today.

    If you can look around at the economy today and say that all of the goods and services in the US are worth a combined 25% less than they were five years ago, you're nuts.
     
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  20. OP
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    If you look at auto & HC insurance costs, medical care out of pocket, tuition, textbooks, shrinkflation at the grocery store, decreasing quality of big ticket items ( planned obsolescence), auto repairs, etc....yes, on a real basis with a proper deflator we have been in depression since 2009.
     
  21. Mman

    Mman Senior Member
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    you are literally insane and incorrect.

    A gallon of milk costs the same as it did 20 years ago.

    Cars are cheaper than they were 10 years ago (for the same level of car).

    And on and on and on
     
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  22. OP
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    The quality of the milk? How much pus, antibiotics, growth hormones, and roundup ready cornfeed residue was in run of the milk 20 years ago?



    Can you DIY repair on today's cars?

     
  23. FlowRate

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    Yeah Chapwood is insane and, after doing some reading about it, largely weights luxury items (country club membership, box seats at sports games, etc. etc.)

    I think this is an interesting and even-headed criticism of how CPI is used, although tangential to our QE discussion.
     
  24. Mman

    Mman Senior Member
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    You are the one that brought up cost, not me. If your grocery bill is so much more expensive, you are a bad shopper. As for cars, I can't DIY repair my 10 year old car or any other.

    You seem to lack a basic understanding of math and finance. Please stop copy and pasting every thought you have from someone else. You don't seem to realize how bad the sources you cite are. You also appear to have no interest in any real discussion.
     
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  25. Raryn

    Raryn Infernal Internist / Enigmatic Endocrinologist
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    This is getting to a very wonkish discussion, because there's also the question of different CPIs. If you account for the fungibility of goods, inflation is even lower than the headline. That is - most people, if beef price goes up, eat less beef and eat more chicken. Or pork. Or fish. Or tofu. Therefore, the impact of beef prices rising is actually less than you would expect given the proportion of spending commonly attributed to beef. They do actually keep a different measurement that takes this into account and just looks at a real-world changes in CPI for all urban customers - called the chained CPI. It's about 0.2% less than the headline number.

    Are there people whose personal inflation rates are more than the CPI? Sure. But it's a pretty good measurement of aggregate inflation for a typical urban individual. Poor people (whose spending is proportionally higher on things like food) and rich people (whose spending is proportionally higher on things like country club memberships) may have a personal inflation that is wildly different from the CPI - but that doesn't mean it's a useless measurement.
     
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  26. OP
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  27. Raryn

    Raryn Infernal Internist / Enigmatic Endocrinologist
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    I quit.
     
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  28. WholeLottaGame7

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    Nah, he/she is totally Crixus from the WCI forum.
     
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