Connecting the Dots

Janet Yellen: The Best Pick Pocket in the USA

December 8, 2015

“Some of the experiences [in Europe] suggest maybe we can use negative interest rates.”
—William Dudley, President of the New York Federal Reserve Bank

“We see now in the past few years that it [negative interest rates] has been made to work in some European countries. So I would think that in a future episode that the Fed would consider it.”
Ben Bernanke

“Indeed, I would be open to the possibility of reducing the fed funds target funds range even further, as a way of producing better labor market outcomes.”
—Narayana Kocherlakota, President of the Minneapolis Federal Reserve Bank

If you are planning to travel to any major European city, you better watch your wallet because there are thousands of very skilled pickpockets looking to separate you from your valuables.

Those pickpockets, however, will only get away with however much money you have in your wallet.

Sure, a pickpocket can throw a major monkey wrench into your vacation, but the amount these European thieves take from you is peanuts compared to what Fed head Janet Yellen wants to steal from your bank account.

While Wall Street experts and CNBC talking heads regularly debate the will-they-or-wont-they interest rate liftoff, a more important question is whether or not the Federal Reserve will follow the European model of negative interest rates.

Negative interest rates are nothing unusual in Europe as several central banks lowered key interest rates below 0%.

Yup, that means investors essentially pay a fee to park their money.

That parking fee just got higher last week when the European Central Bank cut its already negative deposit rate from minus 0.2% to minus 0.3%. The ECB also expanded is current quantitative easing program.

The European Central Bank, the Swiss National Bank, and the Danish National Bank all have interest rates below zero. In fact, the Danes have held their overnight rates at negative 0.75% since 2012.

The Swiss, however, are the undisputed leaders of the negative-interest-rate experiment. The SNB first moved to negative rates in December 2014 and then dropped rates to negative 0.75% in January of this year.

The Swiss National Bank, by the way, meets in a couple of days, on December 10, and is widely expected to cut rates again.

The question, of course, is how negative can interest rates go? Before the end of December, I expect deposit rates in Switzerland to be between -100bps and -125bps.

Remember, we’re not talking about some backwater, third-world countries here. Switzerland and Germany are two of the wealthiest countries in the world, as well as the home of major financial and political centers.

And I’m not just talking about short-term paper either. Finland, Germany, France, Switzerland, and Japan are all selling five-year debt with negative yields. In fact, Switzerland became the first country in history to sell benchmark 10-year debt at a negative interest rate in April.

Don’t think that negative interest rates can happen in the US? Wrong!

You may have missed it, but the United States is now also a member of the “0% club”—most recently in October, when it sold $21 billion worth of 3-month bills at 0% interest.

However, that is not the first time. Since 2008, the US government has held 46 Treasury-bill auctions where yields have been zero.

The next step after zero is negative… and it’s becoming a real possibility. Welcome to the European model of starving savers to death!

The implications for investors are monumental.

Ask yourself, what would you do with your money if your bank started to charge you to deposit it there? Would you pay hundreds, perhaps thousands of dollars a year just to keep your money in a bank?

Option #1: Hold your nose and pay the fees.
Option #2: Move those dollars into the stock market; perhaps into dividend-paying stocks.
Option #3: Buy real estate; perhaps income-generating real estate.
Option #4: Invest in collectibles, like art or classic cars.
Option #5: Stuff your money under a mattress.

The point I am trying to make is, the rules for successful income investing have completely changed. If you are living (or plan on living) off the earnings of your savings, you better adapt your strategy to the new world of negative interest rates… or plan on working as a Walmart greeter during your golden years.

Even if you think I’m nuts about negative interest rates coming to the US, there is no doubt that interest rates are not climbing anytime soon.

According to the Federal Reserve:

“The Committee anticipates that inflation will remain quite low in the coming months.”

“The stance of monetary policy will likely remain highly accommodative for quite some time after the initial increase in the federal funds rate.”

With the US national debt approaching $19 trillion, our government doesn’t have any choice but to keep interest rates low. Sadly, our politicians are paying for their spendthrift ways by starving responsible savers.

But you can (and should) fight back by changing the way you think about investing for income. You can start by giving my high-yield income letter, Yield Shark, a risk-free try with 90-day money-back guarantee.

Tony Sagami
Tony Sagami

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