2020: When Cash Is Trash
- An epic sentence about negative interest
- Zach Scheidt: The Fed embraces NIRP in 2020?
- How to make money despite the assault on cash
- Nomi Prins on U.S. banks’ iffy report card
- Artificial intelligence is a three-horse race
- Dutch grocery store’s Beavis and Butt-Head moment.
“Negative interest rates… appear to be a powerful monetary policy tool that could help ease financial conditions when interest rates would otherwise be stuck at zero as the perceived lower bound, as was the case in the United States from late 2008 through 2015,” says economist Jens Christensen in a paper published by the San Francisco Federal Reserve.
Out of breath? Dr. Christensen, apparently, is a marathoner when it comes to long sentences. Or perhaps the content left you breathless?
Christensen’s thesis sounds like a case of woulda, coulda, shoulda regarding the Fed cutting rates below zero during the Great Recession…
Ben Bernanke circa 2008
Historically, the U.S. has never once tiptoed into negative interest-rate territory… but not so much Christensen’s motherland Denmark. The socialist haven joins Scandy neighbor Sweden along with Japan, Switzerland and the European Central Bank — all five have interest rates below zero.
Will the Fed follow suit?
Speaking of negative interest rates, Fed Chairman Jerome Powell has gone on record saying: “It’s something we didn’t see as an ideal tool in our institutional context.
“I think different central banks around the world [do] different things, and we can observe how those things work,” he sniffed. (At least, that’s what we imagine.) “But I don’t think we regard that as a first-order tool, or something we’d be likely to use.”
That might change…
Our wealth and income specialist Zach Scheidt says: “While it’s never happened in America before, it might happen in 2020.” The “it” being — of course — negative interest rate policy (NIRP).
Here’s some context: “For the last several years,” Zach says, “central banks around the world have been reducing their interest rates as much as possible. The thinking is that lousy bank returns encourage people to invest and spend their money instead of letting it sit idle.”
Aaaand… when that failed miserably, policymakers went subzero. “So instead of receiving interest in a savings account,” says Zach, “people have to pay money on their balances. And people who take out loans may end up repaying less than they borrowed.” Yes, you read that correctly.
Governments, in turn, have been floating bonds with negative yields. “In other words,” says Zach, “buyers will see a loss on their investment.
“At last count,” he says, “there was about $15 trillion worth of government bonds with negative interest rates around the world. The biggest offenders are even charging depositors for keeping cash in the bank!
“It is almost literally a tax on cash,” Zach says, echoing a theme The 5’s been following for years now.
The U.S. might be poised to join the assault on cash, pushed as the Fed is by none other than President Trump… who’s been very upfront about wanting the central bank to cut interest rates to the bone.
The president’s point?
According to Zach: “Higher rates in the U.S. make the U.S. dollar more attractive to international investors. And as they move capital into our country, the value of the U.S. dollar moves higher
compared with other currencies.”
At first blush, it seems like a good thing but, on the other hand, U.S. goods and services become more expensive for overseas consumers holding euros, British pounds or Japanese yen.
“The only way U.S. companies can stay competitive is if the dollar loses value. And to do that,” says Zach, “interest rates have to match levels overseas.” If those rates happen to be negative, so be it.
Most telling, perhaps? “The mere fact that the Fed is willing to cut interest rates during [prosperous] times is very telling,” Zach says. “It means policymakers have shifted the way they handle the economy and influence the markets.”
As for everyday investors, Zach says: “If the Fed decides to institute negative interest rates, the effects will be far-reaching.”
Bank accounts? More trouble than they’re worth? Even if banks don’t advertise that their accounts are serving up negative yields, “they’ll institute new fees to make up for their losses,” says Zach. “Either way, savers will see their wealth chipped away.”
And safe U.S. government bonds — that a lot of retirees depend on — will pay out less than investors paid for them.
But there’s a silver lining to negative interest rates… first, for those who invest in the kind of stocks Zach most loves: income-generating dividend stocks.
Zach recommends stocks that meet his criteria for safety, growth potential and yield. And “the capital gains [you] could reap should more than make up for whatever the bank is taking out of your account,” he says.
“High-yield corporate bonds will also reach new heights,” he says, a phenomenon that’s already causing this market to surge.
“Finally, negative rates will crater the value of the U.S. dollar, pushing up prices for things like gold and oil,” Zach says. “As that happens, we can expect… natural resource investments to head higher.”
Zach’s takeaway: “NIRP’s effects on the U.S. economy could be messy,” he says but encourages investors to position their portfolio for that potential outcome in 2020.
[Ed. note: If negative interest rates do go into effect, you’ll need to squeeze every cent out of your income.
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Curious what U.S. banks got on their “report cards” this year? (Is it one to hang on the fridge… or did banksters “lose” it on the way home from school?)
[Keep in mind: This isn’t the so-called “stress test” Fed regulators put in place after the Great Recession. And no loss there, The 5 said in March…
You might remember what University of San Diego prof Frank Partnoy said in 2009: "There are two problems with the financial 'stress tests. First, they weren't stressful. Second, they weren't tests."]
Thursday, the Board of Governors of the Federal Reserve System published the second annual Supervision and Regulation Report. The report evaluates the financial condition of major U.S. banks, highlighting things such as loan growth and banks’ liquidity.
According to the report, “Large financial institutions are in sound financial condition, although nonfinancial weaknesses remain.” Things considered “nonfinancial” are just minor details — oh, you know, data quality, internal controls, risk management and governance.
We won’t keep you in suspense: 45% of U.S. banks with more than $100 billion in assets received a rating of “less than satisfactory.”
Meaning almost half of U.S. banks got below a C.
“This should not sit well with hardworking Americans who bailed out many banks during the last crisis in 2008,” says former investment banker Nomi Prins.
Making matters worse, she says: “The Federal Reserve report does not say which banks have these less-than-satisfactory ratings.”
“What this means for you is when bank lobbyists keep pushing for more deregulation, remember what happened a decade ago with bank bailouts and a market crash.
“It seems like we need more regulation, not less, if banks continue to receive less than a ‘C’ grade on their report cards,” Nomi concludes.
To the markets where the Dow’s recovering from its three-day skid…
The S&P 500’s added 20 points to 3,114 while the tech-heavy Nasdaq’s gained 48 points to 8,570.
Oil’s gained 4.3% to $58.50 for a barrel of West Texas crude; gold’s down $4.80 per ounce to $1,479.90.
Checking in on bitcoin, the flagship crypto’s up $250 to $7,469.71.
The big economic number today: The Institute for Supply Management issues the ISM Manufacturing Index. Numbers above 50 indicate a growing factory sector; below 50, a shrinking one.
The ISM nonmanufacturing index dipped to 53.9% in November from 54.7% — it missed expectations but not horribly. All to say manufacturing is not dragging down services with it… yet.
“Washington, D.C.… is coming to understand that AI will significantly transform, if not completely reinvent, the world’s power balance,” says Agora contributor George Gilder.
As you might have guessed, China — in particular — is on the government’s radar…
George notes: “In 2017 the Chinese State Council released its national Next Generation Artificial Intelligence Development Plan that set the target of China being the dominant global player in artificial intelligence by 2030.
“This ambitious goal is linked to Beijing’s efforts to make the Chinese economy more innovative, not to mention modernize its military and gain influence globally. AI is a top priority for the highest level of the Chinese government,” George says.
China’s injection of venture capital into AI research, however, has been eclipsed recently by the U.S.
“Last year saw nearly $10 billion in AI funding in the U.S., up 120% from 2017,” George says. “ABI Research puts the U.S. share of global AI venture funding at 52.3%.”
Furthermore, “based on how this year is shaping up,” he says, “ABI expects the U.S. share of AI venture funding to rise further to $14 billion and reach 70% by the end of 2019 and remain atop the AI leader board.”
[By the way: Some AI companies receiving U.S. funding? Cruise Automation, Dataminr, Zoox and Zymergen represent AI research that ranges from autonomous vehicles and industrial manufacturing to robotics, data analytics and cybersecurity. Companies to watch, in other words.]
While venture capital is important for AI supremacy, other factors that support research and development (R&D) are nearly as important. Countries with the brainpower — including researchers, teachers and entrepreneurs — as well as AI patents are sure to win the race.
And it’s a three-horse race, according to Gilder, with the EU competing against the U.S. and China.
“Earlier this year, the Center for Data Innovation (CDI) published a comprehensive report titled Who Is Winning the AI Race: China, the EU or the United States?” George notes. “The report examined trends in AI in the U.S., China and the European Union and provided data on key AI metrics.”
Placing first for the number of AI researchers in 2018? The U.S. — with 10,295 — followed by the EU and then China. The CDI also ranked the number of AI-related academic papers; China published the most, with the U.S. trailing last in 2017.
At present, George says: “When it comes to R&D spending by software and computer service companies, the U.S. commands a huge lead over China and the EU.
“Based on the analysis of key AI metrics… the U.S. [is] the global leader in AI absolute terms,” George says, “with China in second place followed by the EU.
“The battle for global AI supremacy rages on,” says George. “It is a three-horse race. The U.S. is the clear global leader today, not just in terms of venture funding but in other important areas as well.
“But China’s gaining…
“As CDI notes,” George says, “AI leadership could change in the coming years, as China appears to be making… rapid progress.”
The leading grocery store chain in the Netherlands asked workers to upload photos of themselves… in their underwear?
In a moment of sheer dumbassery, the Albert Heijn retailer requested employees at one of its stores to upload undie pics using a nifty new app.
The reason? To figure out employees’ measurements for uniforms.
You’d think some Beavis and Butt-Head-type interns were playing a prank… If only.
"I saw a poster hanging in our canteen and I was shocked," said 17-year-old employee Jochem de Haes. "My mother thought it was a joke.
“But the manager told us that if we don't do it, we can't be in the store anymore because we don't have the right corporate clothing."
The grocery chain, however, insists uploading photos — that allegedly wouldn’t be viewed by management — was strictly voluntary and for the purpose of sizing uniforms for employees at 1,000 stores “in a quick and efficient way,” according to the company’s statement.
The grocery chain has since apologized for its gaffe.
Hmm… How do you say #MeToo in Dutch?
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