​Cash Hoarding has Thrust Negative Rates into Lead Role for Next Crash

Michael Markowski  |

Barron’s “Up and Down Wall Street column surfaces the issue”

The headline for the “Up and Down Wall Street” column authored by Randall Forsyth in Barron’s February 29, 2016 issue was “Less Than Zero”. The “ . . . hoarding of cash necessitated by Negative Interest Rates” covered by Barron’s column has thrust “Negative Interest Rates” into the leading role of the next market crash. The publishing of the column has also sped up the timetable for the next crash to happen. Barron’s, which was founded in 1921 and is owned by Dow Jones/News Corp has 300,000 annual subscribers. Most are experienced and savvy stock market veterans, including institutional investors, hedge funds, and analysts, etc.

The “Up and Down Wall Street” column is revered by investors and feared by Wall Street and corporations. Barron’s editor, Alan Abelson, created the column in 1966 and he remained its columnist until his death in 2013. No subject was sacred to Mr. Abelson. This included the legendary Warren Buffett, whom he criticized for being overly optimistic in Berkshire Hathaway’s 1996 annual report. In a 1999 interview Mr. Abelson said “Basically, our function is to piss in the wind,” and that “Somebody should be standing here pointing out that maybe things are getting out of hand, maybe things are not as rosy as they seem.” The columnist who replaced him, Randall Forsyth has continued on with his legacy.

Because of the “Less Than Zero” title and subject matter of Mr. Forsyth’s latest column the seeds have been planted for a crash that could be caused by the wholesale selling of the markets by big investors who religiously read “Up and Down Wall Street”. The column’s closing sentence:

“The sudden interest in banning big bills seems to have more to do with the imposition of negative rates, which don’t work with stashes of cash.” (February 29, 2016)

During the first two months of 2016, I observed a degree of volatility that I had only seen once throughout my 40-year career in the markets, and that was in 2008. Given my experience and track record for developing algorithms that successfully warn investors about potential catastrophes — including Lehman, Bear Stearns and Merrill Lynch documented in my 2007 Equities Magazine column — I conducted extensive research on the crash of 2008. Through this research I discovered metrics that could have been used to predict the 2008 crash, and the V-shaped reversal. The metrics are now powering an indicator or warning system that I developed and named the “NIRP Crash Indicator” which I am utilizing to monitor the markets for indications of any impending crash. The NIRP Crash Indicator is freely available at www.dynastywealth.com.

Mr. Forsyth dedicated the second page of his column to pose the question of why movements to remove the $100 USD bill and the Europe’s €500 note from circulation have recently surfaced. He went on to say that the arguments or rationale to remove the largest denominations of paper currencies from circulation that are being made by notable public officials in the editorial pages of the world’s leading newspapers was to curtail the increasing drug trafficking and crime. Randall Forsyth, who is also the Editor-in-Chief of The Wall Street Journal Digital Network, stated that he did not find anything to support such arguments. The following information is what Forsyth did provide in his “Up and Down Wall Street” column:

  • The Wall Street Journal reported a sharp increase in CHF 1,000 notes in circulation, each worth roughly 10 U.S. C-notes.
  • And in Japan, there has been a run on safes to store yen notes, the Journal related.
  • World trade shrank 13.8%, measured in U.S. dollars, last year, the first contraction since the crisis year of 2009,
  • Money has been flooding into gold, mutual and exchange-traded funds

The increase in the demand for CHF 1000 notes, also known as Swiss Francs, which are equivalent to approximately $1,000 U.S. dollars can be attributed to hoarding that began after Europe’s Central bank (ECB) instituted a NIRP in 2014. Hoarding in Europe will likely accelerate. In December of 2015, the ECB announced that they would be increasing the rate of negative interest on the cash reserves held by a bank. The ECB will probably increase their negative interest rates within the foreseeable future. The likelihood has increased because inflation rates in Europe continue to decelerate. Please see Bloomberg: “Euro-Area Inflation Rates Seen Heading Back to Zero Again”. (February 27, 2016)

The Japanese will also hoard. Within three weeks of the BoJ instituting a NIRP the controversy began. The Wall Street Journal’s February 19, 2016, story “Negative Rates New Foe: Main Street”, pointed out that “BoJ Governor Haruhiko Kuroda, who announced the nation’s first move into minus rates three weeks ago, found himself dodging a concerted attack in Japanese parliament from lawmakers who charged the policy was victimizing consumers and sending a message of despair.” The only spending that has picked up is for safes.

Randall Forsyth and the “Up and Down Wall Street” column has brought to the surface the issue that negative rates are already resulting in cash hoarding and that the governments of developed countries are taking actions to thwart or prevent cash hoarding. These types of activities being conducted by both governments and their citizens are very unsettling, especially to long-term and large investors. It is only a matter of time before these activities become transparent to Barron’s 300,000-plus subscribers because a majority consider the “Up and Down Wall Street” column to be a must read.

In addition to cash being hoarded by individuals there is a real risk that the banks themselves may hoard cash to avoid the negative interest rates that they have to pay to a central bank. According to the article “It’s a revolution: German banks told to start hoarding cash”: “ German newspaper Der Spiegel recently reported that the Bavarian Banking Association had recommended that its member banks start stockpiling PHYSICAL CASH”. The members of the association are in an uproar about having to pay the ECB the 0.03% NIRP rate on the un-loaned reserves of the banks. According to the article this presents a problem: there simply is not enough physical cash in the entire financial system to support even a tiny fraction of the demand. Total bank deposits exceed trillions of euros. Physical cash constitutes just a small percentage of that sum. If even a fraction of all German banks do start hoarding physical currency, there won’t be any left in the financial system. The article went on to state that this will force the ECB to have to choose between two options; “authorize the issuance of more physical cash; or Impose capital controls”.

The flipside of hoarding issues and the potential for them to be escalated by a government or its citizens and banks is even worse. Hoarding increases future potential for “run on the bank” risks, which if realized, could cause global chaos. There is no doubt in my mind that after a majority of Barron’s subscribers read the column and digest its content they will become very aware of the heightened risks associated with the extremely controversial NIRPs and hoarding. Those investors who find out about the German banks wanting to hoard will also be very concerned. To alleviate the risks which have been escalating I predict many will take some or all of the following actions:

  • Sell out all of their equity and corporate bond holdings.
  • Reduce their allocations of equities in their portfolios.
  • Reduce their allocations of corporate bonds in their portfolios.
  • Increase the portion of government or sovereign debt in their portfolios.

Because most of Barron’s subscribers are savvy investors, most will move their capital into a safe haven by purchasing the sovereign debt securities that are that are backed by the full faith and credit of the governments of the world’s leading developed countries. The primary safe haven countries are the U.S., Germany and Japan. For in-depth information on safe havens and why they are the only defense that can be used against deflation see my white paper “Safe Haven”. My white paper covering deflation is also a must read.

As more and more Barron’s subscribers and experienced and long-term investors exit the markets they will not intend to re-enter until the risk of deflation has abated or has been fully discounted. The foundation supporting the markets at their present, or at discounted levels, will have been diminished. This means that it is inevitable that the markets will experience a mark down from either a crash or an extended correction.

The shares of banks are the most susceptible to a “run on the bank” risk. It is, most likely, one of the reasons the shares of U.S. bank stocks have been under — and will remain under — severe pressure. The S&P Regional Banking ETF (KRE) in November of 2015 reached its highest level since the crash of 2008. During February of 2016 the KRE plummeted to a new 5-year low. The same goes for the KBW NASDAQ Bank Index (BKX) consisting of money center banks of the U.S. The BKX peaked in July of 2015 and also fell to a five-year low during February 2016. Since the risk and the controversy for the NIRPs and negative interest rates continue to escalate I recommend that the shares of all banks including the shares of the major banks and the banking ETF in the table below be sold immediately. The shares should not be repurchased at any price until the NIRPs and negative interest rates have been eliminated:

Sell recommendations for major banks and ETF

Bank/ETF

Symbol

Price @ 03/08/16

Financial Select Sector Spider

XLF

$21.91

Wells Fargo

WFC

49.05

Citigroup

C

41.07

J. P. Morgan

JPM

59.30

Bank of America

BAC

13.14

U.S. Bank

USB

40.00

Goldman Sachs

GS

150.59

Deutsche Bank AG

DB

19.00

Morgan Stanley

MS

25.01

The terms NIRP and negative interest rate should not be confused or intertwined. A NIRP is the inside rate which is also known as the “discount rate” that a central bank charges a member bank on its reserves. A negative interest rate is not established or set by a central bank. It is instead set by the market. Its entirely possible that the sovereign debt securities of a country could have a negative yield even though its central bank has not instituted a NIRP.

This report is in further support of my February 26, 2016 “Japan’s NIRP Increases Global Market-Crash Probability” foundational report, which is about NIRPs and deflation, and the potential devastating impact that both can have on corporate profits and on the markets. The report concluded that the instituting of a NIRP (Negative Interest Rate Policy) by the Bank of Japan (BoJ) had significantly increased market volatility to the point which has increased the probability of a market crash. The report also provides details on research that I had conducted on the Crash of 2008, which enabled me discover the metrics that could have been used to predict the 2008 crash, and the V-shaped reversal. These metrics are now powering an indicator, or warning system that I developed and named the “NIRP Crash Indicator” that I am utilizing to monitor the markets for indications of any impending crash. The NIRP Crash Indicator is freely available at www.dynastywealth.com. Excerpted from the report is my recommended “Pre-Crash ‘Black Swan’ Investing Strategy”. Included in the video interview below is a discussion that I had with SCN’s Jane King about the NIRPs and negative interest rates:

My predictions are frequently ahead of the curve. The September 2007 predictions in my column stated that share-price collapses of the five major brokers, including Lehman and Bear Stearns, were imminent. While accurate, they proved to be premature. That is the reason I advised readers to get out a second time in my January 2008 column entitled, “Brokerages and the Sub-Prime Crash”. My third and final warning to get out, and stay out, occurred in October of 2008 after Lehman had filed for bankruptcy. For my article “The Carnage for Financials Isn’t Over” I reiterated that share prices for the two remaining public companies continued to be too high. By the end of November 2008 share prices of both Goldman and Morgan Stanley had fallen by an additional 60% and 70%, respectively — new all-time lows.

About Dynasty Wealth Investing

Dynasty Wealth Investing is an exclusive investing community, which was co-founded by Michael Markowski. He is predicting that the decade ending 2020 will be recorded by historians as having been the best ever for investors to build dynasty wealth of 10- to 100-times investment from a diversified portfolio. The 6-minute video below about Dynasty Wealth provides details about Dynasty Wealth’s investment philosophy and its analysts. It also covers the industries and companies that have the potential to increase by 100% per year and by 10- to 100-times in value within five years.

Additional videos about producing dynasty wealth are available at http://www.dynastywealth.com/video.php. In-depth information about Michael Markowski and his past and current predictions is available at www.michaelmarkowski.net.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
DB Deutsche Bank AG 8.80 -0.07 -0.79 4,706,078 Trade
USB U.S. Bancorp 48.75 -0.44 -0.89 11,038,108 Trade
WFC Wells Fargo & Company 46.54 -0.49 -1.04 25,913,029 Trade
JPM JP Morgan Chase & Co. 100.29 -0.83 -0.82 19,879,525 Trade

Comments

Watchlist

Symbol Last Price Change % Change
AAPL

     
AMZN

     
HD

     
JPM

     
IBM

     
BA

     
WMT

     
DIS

     
XOM

     

Level Headed at World Crypto Con - Steve Beauregard

Bloq.com CRO Steve Beauregard joins Jack Brewer at World Crypto Con.

Trending Articles

  • No items found.

Emerging Growth

Global Cannabis

Global Cannabis Applications Corp is engaged in the design, acquire data and develop applications for smartphones and tablets. The company offer Citizen Green platform, an end to end infrastructure to…