Banking Turned on Its Head

Posted On Nov 23, 2015 By Dave Gonigam

  • It’s here: Negative rates on cash in the bank
  • Three ways to boost your investment income — including our favorite
  • Rickards now leaning toward a December rate hike…
  • … but that only reinforces his big call for 2016
  • Wine for manly men… is Washington killing the Silicon Valley golden goose? It’s not just the taxi business Uber is disrupting… and more!

And so it begins: “Swiss Alternative Bank Breaks Negative Rates Taboo,” says the headline from the AFP newswire.

The Alternative Bank Schweiz has sent customers a letter informing them effective the first of the year, depositors will pay a 0.125% interest rate to the bank for the privilege of keeping their money there. Deposits over 100,000 Swiss francs ($98,650) will pay a much steeper 0.75%.

It was inevitable: Switzerland’s central bank imposed negative rates on the nation’s commercial banks in January when it depegged the franc from the euro — an act of surrender in the international currency wars.

Soon after, Swiss banking giants like UBS and Credit Suisse jacked up fees on big institutional depositors to help make up the difference.

Now it’s individual depositors at Alternative Bank Schweiz who will feel the pain of negative rates. True, the wire story says this particular bank “grew out of the ideals of the 1960s protest movement” and is “specialized in financing social and environmental projects.”

So yeah, you can write it off as a bunch of hippy-dippy types… but wasn’t it hippy-dippy types who led the way with so many trends decades ago?

In the United States, it’s persistently low interest rates that have fueled investor appetite for quality dividend-paying stocks in recent years.

We anticipated that phenomenon here at Agora Financial — launching our entry-level newsletter Lifetime Income Report in early 2009, only weeks after the Federal Reserve crushed its benchmark fed funds rate to near-zero levels. We’ve shown tens of thousands of people how to generate meaningful levels of income during an era when bank CDs, money market funds and Treasury bills pay squat.

Dividends are swell. But the question persists: What more can you do to grow your investment income?

Our income specialist Zach Scheidt identifies three ways. Let’s jump right in…

“The first way to grow your investment income is a strategy that I consider to be very risky,” says Zach.

It’s leveraging up, or buying on margin. “Most brokerage accounts will allow you to borrow from them (while paying your brokerage interest),” Zach explains, “and use that money to buy more shares of stock.

“In a bull market, this strategy can work out fine. If you have an account with $50,000 in capital and you borrow another $50,000 to buy shares of dividend stocks, you’ll actually own $100,000 in stock. You’ll collect all of the dividends from these shares and make money if the stocks that you own trade higher.”

But in a bad market? “Suppose you have a $50,000 account and borrow another $50,000 from your broker to buy shares,” Zach goes on. “Once again, you will now own $100,000 in stock.

“Now, if the market drops by 25%, your $100,000 in stock will likely lose 25% of its value and you’ll be left with $75,000 in stock positions. But keep in mind you still owe $50,000 to your broker. After repaying the loan, you’re left with just $25,000 — or half of your original amount.

“A second way to grow your investment income is by using your dividend checks to buy new shares of stock,” Zach explains.

But unlike buying on margin, Zach heartily recommends this technique — a dividend reinvestment plan, or DRIP. “When you use your dividend payments to buy additional shares, you’ll receive larger dividend checks each quarter. This is because you’ll own more shares (leading to bigger dividend payments) as time goes on.

“Over time, this method could double the total return on your investment account.” Many dividend-paying stocks offer DRIPs.

But if it’s instant gratification you’re after — collecting an income payment immediately — the only way to go is what Zach calls his “ultimate retirement loophole.”

“This method for increasing your income,” he explains, “puts instant payments in your brokerage account simply by taking advantage of a little-known loophole in the market. These payments can come from stocks we don’t even own, provided you know how to take advantage of this opportunity.

“Also, this loophole can allow you to collect extra income payments from stocks that you already own and put the income into your account right away. You can use this income to cover a bill that you received in the mail today — or to take a friend out to dinner this evening.”

This year, Zach has shown readers how to collect large amounts of income using this method. Last month, they were able to collect $4,386 in instant income payments. So far this month, $1,030 — including $220 just this morning. “Altogether this year,” he tells us, “investors have been able to capture $31,554 in instant income with this method.

“This strategy takes a little more work — usually about 10-15 minutes each week — but the payments are immediate and can add up very quickly.” It’s also a very safe strategy — even safer, Zach says, than DRIPs.

What’s more, if you sign up to try out the “ultimate retirement loophole” before midnight tomorrow night, we’ll make you an unprecedented guarantee. Details here — but please be aware this offer expires in less than 36 hours.

Stocks are treading water as a new, holiday-shortened, thin-volume week begins. At last check, the S&P 500 is up five points, at 2,094.

Gold is testing last week’s 5½-year lows at $1,068.

The big economic number of the morning is existing home sales — down 3.4% in October. The year-over-year increase is 3.9%, the lowest since January.

But the Wall Street buzz is all about what happens when you mix Viagra and Botox — that is, a $160 billion merger between Pfizer and Allergan. The result will be the world’s biggest pharma giant — a lumbering colossus riding the success of past drugs with precious little new in the pipeline. But the combined firm can be headquartered in Ireland, where corporate tax rates are lower.

The Federal Reserve may or may not lift its discount rate by the time you read this.

It’s the fed funds rate that’s gotten all the attention since the Panic of 2008… but the Fed also controls the discount rate — the rate at which it lends to member banks.

At present, the rate is 0.75%. The last time the matter was discussed at a Fed board meeting (not the same as the Fed’s Open Market Committee), eight of the 12 regional Fed banks advocated raising the discount rate.

The people who pay closest attention to this sort of thing seem to think the Fed board won’t move today: “On balance, the Fed’s leadership likely prefer not to disrupt or confuse with a discount rate hike,” says Marc Chandler of Brown Bros. Harriman. “Instead, following liftoff [of the fed funds rate in December], the discount rate most likely will be hiked.”

“If the next jobs report is great on Dec. 4, the Fed will raise the fed funds rate on Dec. 16,” says Jim Rickards.

If that sounds like backpedaling, it’s not. It’s a continued assessment of new incoming information — a key to Jim’s successful “Kissinger Cross” strategy.

Jim described that new incoming information yesterday during a summit at our conference center in Rancho Santana, Nicaragua — where he debriefed publishers and experts from eight countries where we distribute his research.

“After a year of bluffing,” Jim said, “the Fed’s tough talk, economists’ expectations and fed funds futures are all aligned. The Fed has given markets no reason to believe they won’t raise. Ninety percent of economists expect it, and the futures market is pricing in about a 90% likelihood that they will do it. The theory is that if expectations and intentions are aligned, there will be no ‘shock to the market’ and the rate hike can be digested smoothly. So this may be the time to hike rates.

“There’s no fundamental case for raising rates, even though they probably will do it. It’s almost as if Janet Yellen’s saying, ‘We’re going to raise interest rates… just because.’

“They’ll be tightening into global weakness… and a slowing U.S. economy. That will be making the situation worse. That will become apparent in the months ahead.”

Which brings us back to Jim’s big forecast for 2016, shared here more than a month ago — the Fed will ultimately ease policy next year.

“They may tighten first… and then ease. They may even rush through two rate hikes — in December and January or December and February — and do it even faster than the market expects, just so they can cut [later].

“But one way or another, they’re tightening into weakness. This weakness is going to manifest itself. So it might not be till next summer… but sometime before… the U.S. economy will be close to recession. And they’ll have to ease. That just means more volatility.”

[Ed. note: As we said last week, Jim is constantly testing a thesis against new incoming information — using an equation developed by Thomas Bayes in the 1700s. You assess the new incoming information… and if it challenges your thesis, you shift.

That’s the key to how some of Jim’s premium subscribers have applied the “Kissinger Cross” strategy this year for gains of 102% in four months… 150% in less than a month… and 162% in under six months. For access to three new trades using this revolutionary technique, look here.]

Curious marketing concept of the day: wine for men who think wine isn’t manly enough.

Mancan Wine hails from Sonoma County and comes in three varieties — a “red wine blend,” a “white wine blend” and “fizzy white wine.” Slogan: “Shut up and Drink.”

If you must know more, it’s on the back of each can…

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Mancan is keen to say corkscrews and stemware just get in the way… but we concur with the New Zealand-based website Stuff, which headlined its story “Wine in a Can for Men Is the Latest Unnecessarily Gendered Item.”

A case of 24 costs $77 if you order it from Mancan’s website — which says that’s equal to 12 bottles. So that’s the equivalent of $6.41 a bottle. To make a statement about your masculinity, or if you really want the convenience of wine in a can while you’re fishing or something.

We’ll stick with boxed wine and plastic cups for that purpose, thank you…

“Friday’s 5 describing how the White House wants to ‘talk’ about with Google and Apple execs about end-to-end encryption makes me think that the feds are absolutely pushing those companies to eventually leave the U.S.

“Or even more likely, I think, have a foreign competitor start up a similar company that is completely free of U.S. influence somewhere else in the world — possibly Brazil or Russia, for example.

“Just as money goes where it is treated best, so too should privacy and security, and the U.S. is just about dead last in that regard.”

The 5: Yep. We’re already seeing a bit of this with Microsoft opening a data center in Germany under the control of a “data trustee.” European customers can keep their information in the cloud… but also keep it hidden from the U.S. government.

Thus “Microsoft is unable to access user data without the permission of the data trustee or the customer, even if it is instructed to do so by the U.S. government,” says a story at Ars Technica.

“You’re missing a big factor in the rental car business,” a reader writes after our take on hard times in that business — “Uber.

“We’ve taken to using them in place of rentals probably 70-80% of the time on business trips. Only use rentals now when we have to get around to multiple locations fairly far apart.”

The 5: Good point. Uber isn’t just a cheaper and more convenient alternative to taxicabs. “While companies like Uber are not going to take over the car rental business anytime soon,” says Dan Amoss, who heads up our Jim Rickards research unit, “they’ll chip away market share just enough to ruin pricing power.”

Best regards,

Dave Gonigam
The 5 Min. Forecast

P.S. It was a “Kissinger Cross” trade that enabled some of Jim Rickards’ readers to profit from the misfortune of Avis Budget Group this summer — bagging a 150% gain in 25 days.

Jim has ample examples showing you just how these trades work — and how you can lay on three of these Kissinger Cross trades right now for fast-moving gains of up to 370%. Jim sets out the proof for you right here.


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