Negative Rates & The Devalue Or Die Era
The “devalue or die” currency wars are picking up steam; Japan’s central bankers are not alone when it comes to taking rates into negative territory. A host of European nations are now joining the bandwagon, and the latest victim is Sweden. We alluded to this development a long time ago and published a host of articles on this topic. Central bankers Worldwide understand that the only driving force behind the magical recovery in the U.S s hot money and that is the only weapon that can maintain that illusion. Get ready for negative rate wars; imagine having to pay the banks to keep your money; soon people will start to question the value of banks.
Sweden’s central bank stated that they would continue to follow this path to achieve its targeted rate of 2% inflation in 2017. Our response is good luck dudes; this is not going to be possible for the velocity of money has dropped dramatically. You have to create money and put it into the hands of the masses to create chaos, oops we mean boom and bust cycles. This was the precursor to the subprime mortgage crisis of 2008.
What is the velocity of money? Well as the term implies it is the speed at which money moves around. When an economy is healthy, money tends to move around quite rapidly as there is a lot of buying and selling. Sadly the opposite is occurring today; the velocity of money has been in free fall since the housing crisis. We will address this topic in more detail in a follow-up article. The extremely low velocity of M2 money stock clearly illustrates that this economic recovery as we have so many times pointed out is nothing but a hoax.
Sweden’s central bank reduced to the repo rate to negative 0.50% from negative 0.35%. The Krona as expected dropped as that is really what the whole purpose of this exercise is all about. Competitive currency devaluations are here to stay, and there is a race to reach the bottom.
The majority of economists at Bloomberg and the Wall Street Journal were expecting a rate cut, but they were not expecting it to be so steep. In our opinion, this clearly confirms our long-standing argument that this entire economic recovery is nothing but one massive illusion.
How to play this game
Central bankers will continue to flood the markets with hot money, and hot money has the effect of propelling the markets higher. In this setup, both Gold and stocks can trend higher. Our advice, therefore, is to start building up a position in bullion slowly and to use strong pullbacks in the market open up positions in companies with strong product lines and high growth rates. Some examples are AMZN, FIZZ, TAST, HRL, HAS, COST, etc.
The Fed will join the negative interest rate party sooner or later. Look at the bond market it has rallied in the face of an interest rate hike. In fact, it is trading at new highs as we speak. This is a signal that the Fed’s hands are tied and that sooner or later it will have to join the “negative interest rate club”. In this race to the bottom, resistance is futile.