By Sol Palha
A man makes inferiors his superiors by heat; self-control is the rule.
Ralph Waldo Emerson
Central bankers are declaring war on cash for one reason only; they want to punish savers and reward speculators and in the process destroy the middle class. The only way to maintain the illusion that all is well is to get the average Joe to embrace this illusory economic recovery and what better way to achieve this then by forcing them to speculate in the markets. The best way to force savers to speculate is to punish them for saving, and that is exactly what central bankers have been doing, and the outlook will only worsen as central banks worldwide embrace negative rates. Those calling for higher interest rates or hoping for them are living on another planet; higher rates are history. The new trend is negative rates and investors need to adapt or die; there is no middle ground here.
When savers start getting charged for saving money, they are going to withdraw these funds and try to find alternative investments. Some will buy safes to hoard their cash, and some will turn to Gold but the vast Majority will look for something to invest this money into and for most this will be the stock market. Why would they turn to the stock market? Possibly because most investors are not familiar with the concept of hard money and don’t understand that precious metals in general preserve one’s purchasing power over time. Even if they knew this concept, putting all of one’s funds into a single investment is not prudent; it is reckless. However, in this environment, allocating a percentage of your funds to Gold would not be a bad idea.
QE for the people by the People
The masses despise this market; they are reluctant to invest in a market where the prevailing themes are fraud and manipulation. Gone are the days when the Fed tried to be overt and cover its tracks, today manipulation is the order of the day. If the supply of hot money is cut, this bull market will end immediately and what will follow is a very scary meltdown, and that is precisely why the Fed will not stop intervening. They will inflate to infinity or until the masses revolt and as we have stated before, who knows when that event will occur. The masses are not only asleep, but they are also in a deep coma, and it is going to take a miracle or massive shock to snap them out of this comatose. So if you want to kneel down and pray or suck your thumb and hope that by signing “Kumbaya”, they will suddenly snap out of this deep sleep, you are sadly mistaken.
The Fed has been actively intervening in this market forever; their first brazen attack was shortly after the crash of 1987. If the masses have kept quiet for so many decades what makes you think that they will suddenly wake up today. They have been creating money out of thin air since we went off the Gold standard and most individuals today are not even aware of this concept. Try to reintroduce it and we bet most would resist. You cannot accept something you do not understand even if it is for your good. You need to understand the problem to find the solution. Ignorance is one of today’s main problems, and diversion is the second. Nobody wants to focus on the real issue; he or she seek distractions so that he or she can ignore reality and live in the illusory world of “Alice in Wonderland”. Translation, QE is not over by any order; in some cases, we can argue that it might have just begun. The purpose of QE was to provide liquidity to the markets or in plain speak, to prop the markets up with hot money.
By forcing savers to speculate, the Fed will have created the equivalent of several QE's in one shot. There are billions if not trillions of dollars sitting in money market accounts, savings accounts, etc. A great portion of these funds will find their way into the Stock markets in one form or another. Moreover, a significant number of pension funds will be forced to speculate as the yield on treasuries is so small that management will soon not be able to justify the fees they charge to manage this money. When negative rates hit the US, a flood of money will make its way into the markets as investors desperately seek higher yields.
Negative rates being embraced everywhere
Germany became the 2nd G-7 nation after Japan to issue a 10-year bond with a negative yield. Soon every member of the G-7 club will be forced to take a similar path. There is no choice here; resistance is futile, and the only option now is to join the "devalue or die club". The yield on Germans 10-year bonds dropped to negative 0.05% for the first time and hit a record low of 0.2% before edging higher. Before this experiment is over rates will probably drop to -3 to -5%.
"This auction is a symptom of what we are seeing globally," said Orlando Green, European fixed-income strategist at Credit Agricole. "We are in a positive market environment for bonds right now, and investors remain relatively long German Bunds."
"It would be the icing on the cake for investors who have come to accept that you do not get money back on your investment," said David Schnautz, an interest rate strategist at Commerzbank, referring to a negative yield at the German auction.
Even nations like Italy and Portugal which are in dire straits can sell bonds at extremely low rates; sure the rates are not negative, but it was not too long ago when these two countries were having a hard time selling anything. Now people are willing to purchase their riskier bonds because of the allure of slightly higher yields. We suspect that these two countries will eventually be in a position to sell bonds at negative yields.
Your gut instinct screams at you and tells you that this market is destined to crash and that you should avoid this market at any cost. Well, how has the worked out for you? Not so well right. The market is soaring higher and higher, and you keep asking the same silly question and supporting those stupid questions with the same silly answers. When in fact, what you should be doing is looking at what your friends and neighbours are doing. If they share the same views as you, then you know that you are most likely on the wrong side of the market. We do not mean to sound brutal or cold, but the market takes no prisoners. It does not care about your well researched logical arguments; those are useless when it comes to the markets. The only thing that matter is what side of the equation the lemmings (masses) are on. Mass Psychology clearly states that a market will not crash if the crowd is anxious and the crowd has been decidedly anxious or fearful for nigh on eight years. Has the market crashed? Some will say yes, but it was a crash only because they bought right at the top. In fact, those so-called crashes were nothing but buying opportunities, as the bears who shorted the markets found out the hard way. On each occasion, the market recouped all it’ losses and soared to new highs. If you want to keep doing the same thing again and again, hoping for a different outcome, we have no news for you; there is a term for such a disorder. It is called insanity.
What you need to understand is that the negative rate experiment has just begun. There is no turning back, and this operation will continue until central bankers are forced to stop. Who knows when this will occur or what will eventually force the Fed’s hand? In the interim, the markets are destined to soar a lot higher and if you continue you with your same old arguments, or you listen to the penguins who market themselves as experts, you can expect the same outcome; anger and loss will be your only companions. Alternatively, you can embrace the new paradigm and understand that until the masses embrace this bull, it will continue to run down everyone that stands in its path.
One possible solution is to build a list of stocks you would love to own, and then wait for corrections ranging from medium to strong before committing new funds to this market. The more substantial the pull back, the greater the opportunity and this will apply until the masses embrace this market with gusto. The other option is to continue doing what you are doing and hope that things work out. With or without manipulation there is always a trend; identify and follow the trend for it is your friend; everything else is your foe.
An angry man opens his mouth and shuts his eyes.
Cato The Elder