Fed Will Be Forced To Lower Interest Rates And Declare War On Cash

March 29, 2016

The chart below quite clearly illustrates why the Fed has no option…but to lower interest rates.  Central bankers worldwide have already embraced negative rates. Therefore, it is just a matter of time before our Fed is forced to walk down the same path.  The Fed is trying to put on a brave act, but you can already see it backtracking from the strong stance it harboured last year. Now many are stating that all is not well…and the economic outlook is weaker than expected. Rubbish, we already stated in several articles that central banks would take this path -- and that the only reason they even raised interest rates was so that they could come out with an excuse to lower them again. 

When an economy is booming, the velocity of money increases. And as you can see from the chart below, the velocity of money has been dropping quite precariously. Hence, the only thing supporting this market is hot money. Take away the hot money, and this illusory economic recovery crumbles.

The chart topped out in 2000 with a double top formation.  We did get a small pop up when Alan Greenspan flooded the markets with money to create the housing bubble, but it put in a lower high. After that, it has been nothing but a downhill ride, which is why Gold prices have tanked. Subsequently, money supply has increased, but the money is not moving, because the masses do not yet have access to this money.  This is why we stated that if they really want to create a monstrous bubble, they need to put this money into the hands of the masses. Only the masses are foolish enough to take markets to levels you can only envision after smoking some illegal substance.  This is why we are dead certain that the Fed will come out with another stimulus plan. Indubitably, this economic recovery is being held up by hot money…and nothing else.

If the recovery were real, interest rates would not be held low for so long, and the Fed would need to support the stock market. After it stopped, the corporate world stepped in via the illegal usage of Stock buybacks. Now, instead of trying to improve the bottom line, they focus on simply buying back more shares – resulting in artificially boosting the EPS. It’s a perfect scam, no work and big pay; and as interest rates are low, the incentive to borrow large sums of money to do these dirty deeds is larger than ever.  Hence, expect stock buybacks to surge to levels someday that will appear insane. 

Game Plan

The negative rate wars have just begun. Consequently, it’s just a matter of time before our central bankers take the same path. This ultra-low rate environment created the perfect backdrop for speculation.  Individuals and corporations looking for better returns were forced to speculate.  However, the corporate world took things a step further; they went on share buyback binge…and this binge is not showing any signs of letting up.  It allows corporations to borrow money for next to nothing -- and then use these funds to buy back massive amounts of shares in their own companies; thus boosting the EPS (Earnings Per Share).  Negative interest rates will be akin to offering a crack addict, super crack; do you think he is going to refuse this offer? Negative rates will provide rocket fuel to the share buyback programs. Individuals should expect corporate debt to hit insane levels before a top is in. Although today’s debt levels might appear crazy, they will look sane in comparison to corporate debt in the near future.  Thus, all strong corrections should be viewed as buying opportunities.  From a mass psychology perspective, this is still the most hated bull market in history. And until the masses stampede in, it is destined to run a lot higher than most envision.

Lastly, we would suggest having a core position in Gold.  At some point in time, Gold will start to react strongly to this massive form of currency debasement. Currencies are being destroyed on a global basis at a level never seen before. This will not end well, but as we have pointed out many times before, being right does not equate to market success. One has to look at the time factor, and most individuals do not have the staying power to bet against the Fed. Wall Street is full of tombstones of good men who were right…but could not stay solvent long enough to benefit from their keen insights.  Hence, we would not bet the house on Gold…and nor should you. No matter how good an investment appears to be, one should never put all of one’s eggs in one basket.


Courtesy of www.tacticalinvestor.com

Gold prices fall by Rs 50 on low demand