S&P 500 Analysis & ETF Trading

[kiy]

Negative interest rates

The ECB realized that if they couldn’t get banks to loan or consumers to spend, why not really light a fire under their ass and tell them: “if you’re not going to spend, you have to pay to keep your money in the bank!”

The Swiss thought this was a great idea and did the same in December 2014. Later on, the Danish and the Swedes joined the party. And last week, the Bank of Japan decided zero wasn’t enough, either – they went negative, too!

Japan can’t seem to get a grip on the fact that, as a country, they’ve been slowly walking off the plank since 1989 back when everyone (except us) thought they were going to take over the world. They actually started experimenting with QE back in 1997, right after the last of its baby boom peaked in spending as we forecast would happen. And in early 2013, they really stepped on the gas, ultimately tripling their QE!

And what does Japan have to show for all that?

In the 20 years between 1996 and 2015, Japan’s GDP has grown by a lousy 0.17% as the country’s been on-and-off in recession.

Inflation has been comatose as well at near-zero, only bouncing temporarily at first with the surge in QE in 2013 forward.

Japan has the highest debt ratios of any major country. Their 10-year bond yields recently sank to 0.045%, which adjusted for inflation is well into negative. And now they’ve officially adopted negative short-term interest rates of -0.10%.

Look, I get it. Japan’s desperate. Officials aren’t going to stand by and watch as their country continues to sink into oblivion. But how much longer can this delusional policy of bubble denial last?

Japan couldn’t get its GDP off the ground even after tripling its QE. This just proves that it takes more and more of a financial drug to create less and less of a high. These slightly negative interest rates will likely achieve very little.

But clearly negative interest rates are becoming the next evolution in global stimulus. Central banks have tried and tried to save the global economy from the next crash, and clearly they’re willing to do anything until they’re forced to let reality sink in.

Now, I’m sure the Fed will be next.

It’s become quite clear that the Fed got ahead of itself by raising rates in December. The markets have been getting swung up and down like a rag doll as oil crashed even lower than I expected, and as analysts have finally started to catch on that China isn’t all it’s cracked up to be.

And now Japan has thrown them a real curve ball. How can the Fed continue to raise rates when the rest of the world is stuck in reverse? Another rate hike would just mean a stronger dollar and more trouble when the global downturn finally hits us here and the Fed realizes it’s time to go negative.

Stocks in the U.S., Europe and Japan have already gone nowhere since late 2014. And right now the Dow just can’t seem to recover from a horrible January. It’s still possible we could see another bounce. After all, the financial markets love it when they get news of more crack from the central banks. But this looks like the beginning of the end.

I never thought that after the 2008 crash that central banks would go this far, this long. But desperation can only go so far. It’s doubtful they can keep it up for much longer.
http://economyandmarkets.com/economy/central-banks/negative-interest-rates-are-the-next-stage-in-global-stimulus/
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...in The Beginning of the End of the old system...
The Holy man at the grocery checkout and the 100th Monkey...
I make a comment about the people giving their money to the rich in the big tax give away recently. I feel like we're just cattle for the slaughter.

He said something like we are seeing the beginning of the end of the old system. He was not concerned about the surface issue: artifacts of a dying system. He felt that change is already afoot and we are already on a path to major changes sometime in 2012....2013...2014...2015...2016...
... its just that humans... they seem to complicate everything they touch...People are funny that way...plain quirky...
And so there we have it. The Crazy has been upgraded to Crazier, and there’s no reason evenCrazierStill isn’t just around the corner. People are funny that way. (...proves my statement " Humans aren't complicated...they just complicate everything ...and then on top of complicated everything... Humans... they want a guarantee..." LOL...Lol...lol...LOL ....LoL ...
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http://economyandmarkets.com/demographic-trends/retirement/the-next-bankruptcy-to-hit-your-portfolio/
States around the country have racked up outrageous unpaid balances for their pensions. Few of them have any plan for digging out of the hole. Since they have no plan, they’re creating issues for everyone who might be called upon to help them make good on their obligations.

...states like Illinois, state pension benefits are constitutionally guaranteed, so benefits cannot be cut. This leaves taxpayers in the state to foot the bills as they come due, no matter what the cost. And in some cases, bondholders suffer as well.

In Illinois, the unfunded liability sits at $110 billion and is getting worse by the month. After years of mismanagement by the state, Illinois has about 48 cents of every dollar it needs to make good on its pension promises.

Across the country, smaller entities like cities, school systems, and counties are suffering from the same disease – official mismanagement.

The basic problem is that current politicians negotiate changes, while future politicians are left to clean up the mess when things blow up. These changes include benefit increases, fewer years of service needed to retire, and how much the entity will contribute each year to the pension.

Now, the politicians who created today’s problems in the 1990s and early 2000s aren’t around to answer for their sins.

Meanwhile, the workers who toiled for years with their pensions in mind want what is rightfully theirs.

This is all coming to a head in states like Illinois, and cities like Chicago. The money’s running out, and government officials refuse to raise taxes any higher on their constituents.

It’s about to get interesting, and not in a good way. As to what lies ahead, we have two prime examples. One has already played out, and the other is still unfolding.

Fool Me Once, Shame on Me

The city of Detroit’s bankruptcy was the largest municipal failing in U.S. history. It owed $18 billion that it could not pay. With falling tax rolls and declining population, Detroit begged, borrowed and stole for years to keep going. Eventually it reached the end of its rope.

Besides pensions, the city was also indebted to its bondholders. At the time, investors who bought bonds felt pretty secure. After all, they were backed by the full faith and credit of the City of Detroit. Later on, they realized their mistake.

The contract said that bondholders would be paid before anyone else. No one ever assumes the worst – like a bankruptcy – will come. But here’s a question: what city officials in their right mind will choose to pay bondholders over their police officers, firemen and teachers? Even though it is legally correct, any politician that did so would be run out of town on a rail!

It’s true that some of those boldholders are regular guys like you and me just trying to fund their own retirement. Even so, the town had no intention of paying them with every last dime available. Instead, they diverted money to payroll and city services. They kept their city running.

That might seem like a humane decision, but it defied the contract the city signed when it took the money from bond investors.

The worst offender is the Detroit pension system itself. Detroit borrowed money specifically to top off its ailing pension plan, but then fell behind anyway. When the city went bust, it claimed this bond issue was unauthorized, and therefore they didn’t owe the bond investors anything.

They wanted to have it both ways: get the money, and owe nothing.

And that’s what happened. The bondholders that funded the pension received about 15 cents on the dollar. Meanwhile, the retirees got almost everything they were owed.

Fool Me Twice…

Now Puerto Rico is doing the same dance. The island Commonwealth owes roughly $72 billion among several issuers, including their power authority, general obligation bonds, local development authority, and “moral obligation” bonds.

I put the last one in quotes because these bonds were anything but moral.

When the island reached its maximum borrowing capacity, it wanted to borrow more. So instead of issuing general obligation or some other traditional bond, it issued what are called “moral obligation” bonds. These bondholders couldn’t sue for payment. Government officials were only morally, not technically, obligated to pay them.

That didn’t last too long. Puerto Rico has already quit paying on these bonds. Now island officials are negotiating with the other bondholders on how big of a discount they will get, even as the officials illegally move money from one pot to another.

Since this is a Commonwealth and not a city or county, it doesn’t have access to federal bankruptcy law. The government of Puerto Rico is supposed to pay its debts, period. And it can. The island has enough assets that it could sell to meet its obligations. It can also cut benefits and reduce payrolls.

But it won’t. Instead, it will lay the problem at the feet of bondholders.

This is where you become the bank.

If you own a tax free bond fund, chances are you own Puerto Rico bonds, and your fund will take a hit.

Unfortunately, most bond fund buyers don’t look beyond the rating and the yield on the fund. These metrics won’t help. Investors need to do a much deeper dive on what they own to make sure they aren’t holding the bag when things blow up. This is one time when it doesn’t pay to be the bank.


Negative Interest Rates