June 8, 2016, Stansberry Digest
This is not normal... An unbelievable new record in bonds...
Big banks are revolting against NIRP (negative interest rate policy)...
'Hoarding billions in vaults'...
If you remember nothing else from today's Digest, remember
this: What is happening in the markets today is not normal.
News that would have been considered unthinkable just a few
years ago has now become routine...
For example, we note
the yield on 10-year German bonds; the European equivalent of 10-year Treasurys
here in the U.S; plunged to a record low of 0.033% today.
Said another way, the benchmark sovereign debt of one of the
world's most important economies yields less than one-half of one percent. And
analysts believe it could hit 0% as early as this week.
Of course, European
sovereign yields are plunging thanks to the European Central Bank's
("ECB") massive easing programs.
The ECB's quantitative easing program has purchased more
than 1 trillion euros of bonds so far. Its easing program is now officially
bigger than those of the U.S. or Japan, on a relative basis. But it's about to
get even bigger...
Effective today, the
ECB is buying European corporate bonds, too. The program will officially target
only investment-grade corporate debt, but that rule comes with a catch. As
Bloomberg reported this morning...
The European Central Bank didn't shy away from the region's
riskier securities when it began buying corporate bonds on Wednesday.
Purchases included notes from Telecom Italia SpA, according
to people familiar with the matter, even though Italy's biggest phone company
is rated as sub-investment grade by two ratings firms. The company's bonds are
in Bank of America Merrill Lynch's Euro High Yield Index and credit-default
swaps insuring the notes against losses are part of the Markit iTraxx Crossover
Index linked to companies with mostly junk ratings.
Mario Draghi is showing he's planning to make the biggest
impact possible on the first day of corporate bond purchases by casting his net
as wide as the program allows. While the ECB has said it would buy corporate
bonds with a single investment-grade rating, some investors expected the
central bank to start with the region's highest-rated securities.
Yes, you read that
correctly. The European Central Bank is now printing money to buy junk bonds.
What could possibly go wrong? In the meantime, the
unintended consequences of the ECB's massive easing programs are becoming
undeniable...
Earlier this year, Munich Re – the world's
second-largest reinsurance firm – publicly announced it was loading
up on gold and cash to counter the ECB's move into negative interest rates.
Today, we learned one of Germany's biggest banks could soon
do the same...
According to news service Reuters, Commerzbank is
considering "hoarding billions of euros in vaults" rather than paying
to keep it with the ECB. From the report...
Commerzbank's examination of storage alternatives to the ECB
comes at a time of growing frustration among European lenders with the ECB
charge on deposits. Were it to store cash on a significant scale, it would
become the first major European bank to take such a step... If other lenders
were to follow suit, it could render the ECB penalty charge policy increasingly
ineffective.
The ECB imposes a so-called negative rate equivalent to four
euros annually on each 1,000 euros ($1,137) lenders deposit with the central
bank. This is designed to encourage banks to lend money, rather than park it.
But some banks complain that a dim global economic outlook
means there is weak demand for loans on the terms they require, and they have
little option but to hoard cash.
Again, these ideas
aren't coming from gold bugs, radicals, or conspiracy theorists. They're coming
from the executives of major corporations.
If these folks are considering hoarding cash and gold, you
can be sure there are plenty of others who are thinking the same thing.
But it's not happening only in Europe...
The Bank of Japan's ("BOJ") easing programs are
second only to the ECB's in relative size... But it has pushed interest rates
even further into negative territory. Ten-year Japanese government bonds
"yield" -0.13%, while 30-year government debt yields just 0.29%.
Recently, the BOJ has hinted it could push rates even
lower... and it seems Japan's biggest bank has had enough...
The Bank of Tokyo-Mitsubishi UFJ ("BTMU") is one
of several "primary dealers" of Japanese government debt.
In simple terms, this means it acts as a middle man or
"market maker" between the government and investors. But this role
also requires the bank to bid on at least 4% of every government bond
issuance... meaning it can end up holding a lot of negative-yielding debt.
This morning, the bank said it is now considering giving up
its role as a primary dealer.
This announcement follows recent criticisms from the
company's president, Nobuyuki Hirano. Hirano was the first big Japanese banking
executive to speak out on the BOJ's negative interest rate policy, saying it
had "caused households and business to rein in spending by creating a
sense of uncertainty about the future."
Given the growing backlash against these policies, you might
think central banks are reconsidering their stance.
You would be wrong...
In response to BTMU's announcement, the Wall Street Journal
reports that "a person close to the BOJ" said it would actually be
"welcome news."
Why? Because it would mean that Japan's biggest bank was
"diversifying into riskier assets."
What's happening today is anything but normal. And more
important, it is virtually guaranteed to end in disaster. As Porter explained
in the
April 22 Digest...
Over the last 20 years or so, the world has seen an explosion
of debt unlike any other period in history. Most of these obligations wouldn't
have been financed by the free market.
But rather than live within the means of the free market,
governments from almost every major nation have engaged in massive currency and
interest-rate manipulation. And that's not all. They haven't merely guaranteed
the availability of capital in more and more ways... They've also guaranteed
the principal of the loans.
We're already so late in the game that the expense of just maintaining
the existing debts can't be honestly financed. Negative interest rate policy
("NIRP") is the new idea. Charging insurers and big banks negative
interest rates might work for a while to keep the music playing because the
public generally fears and hates these massive institutions.
But what will happen when the government must finally begin
to tax the ultimate guarantor in our debt-backed, global banking system? What
will happen when the taxpayers face negative interest rates, huge increases in
taxes, enormous cuts in benefits, or crashing currency values?
As we've discussed this week, predicting the timing of these
events is difficult. But we now have clear evidence that insurers and big banks
are beginning to revolt against negative rates.
Regards, Justin Brill, Baltimore, Maryland. June 8, 2016
Source; Stansberry Digest
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