Few people are more reviled by everyday people than bankers, and rightfully so.
They hide usury in fine print and send your neighbors to evict you in their stead.
They distort and manipulate markets for their own gains, from LIBOR, to the gold fix, to silver prices, to exchange rates, and on and on.
Then, with the corruption of a wink and a nod, they use regulatory capture to remove all risk and collect cushy bailouts while our jobs disappear, wages effectively shrink, and neighborhoods fall into squalor.
But what if something came along that was so destructive that both common people and financial executives came together.
$10 trillion in debt has now dipped into negative yields, and the damage is starting to show.
Worldwide, everyday people are getting squeezed by central banks, but they aren’t alone. We’re also seeing more and more dissent from the big banks at the heart of the global finance system.
As the nuts and bolts of economics are being openly questioned from both ends of the economy, it isn’t just pitchforks and torches on the horizon that unelected central bank officials need to consider.
Now there is an insider threat, and it shows how untenable NIRP has become when such strange bedfellows come together.
Tearing Europe Apart
The cracks in the European Union have been spreading for some time, and we’ve certainly seen it indirectly through social unrest.
We’re seeing anti-immigration policies and spending when many countries still have unemployment in double digits.
Economic isolationism and anti-EU sentiment started in the worst parts of the economic zone, like Greece. Then it turned into pushback from the well-off parts, like Britain and Germany.
We’re seeing nationalist parties in every country make unprecedented gains in representation across the entire continent. In less than two weeks, we’ll even see if Britain, one of the core members both politically and financially of the EU, carves itself out.
Now we’re even seeing financial institutions at the heart of the banking system vehemently dissent and stand against the European Central Bank.
Deutsche Bank’s chief economist David Folkerts-Landau just released a scathing report, aptly titled “The ECB Must Change,” in which he calls the ECB out from a banker’s perspective, which is now eerily similar to a layman’s.
“After seven years of ever-looser monetary policy there is increasing evidence that following the current dogma, broad-based quantitative easing and negative interest rates, risks the long-term stability of the eurozone…
…Already it is clear that lower and lower interest rates and ever larger purchases are confronting the law of decreasing returns…. but the ECB’s response is to push policy to further extremes. This causes mis-allocations in the real economy that become increasingly hard to reverse without even greater pain. Savers lose, while stock and apartment owners rejoice…
Thereby ECB policy is threatening the European project as a whole for the sake of short-term financial stability…. The longer policy prevents the necessary catharsis, the more it contributes to the growth of populist or extremist politics…
A returning to market-based pricing of sovereign risk will incentivize governments to begin growth-friendly reforms and to tackle fiscal stability. Flagging the move should dampen adverse reactions in financial markets.
We believe that normalising rates would be seen as a positive signal by consumers and corporate investors. The longer the ECB persists with unconventional monetary policy, the greater the damage to the European project will be.”
In Japan, It Is Now Political
Across the globe, it has been a couple weeks since the normally unanimous Bank of Japan saw its first internal dissent.
Bank of Japan policy board member Takehiro Sato went public in a speech to business leaders. Here are some key quotes showing what amounts to complete opposition to the Bank of Japan’s current course:
“When there is a negative spread, shrinking the balance sheet, rather than expanding it, would be a reasonable business decision… restraining loans to borrowers with potentially high credit costs and raising interest rates on loans to firms with poor access to finance.”
As for those borrowers, think small businesses, entrepreneurs, everyone from the middle-class down, and virtually everyone but the corporate interests that have succeeded in regulatory capture worldwide.
“A weakening of the financial intermediary functioning could affect the financial system’s resilience against shocks in times of stress.”
In other words, there is no capacity to react to any recessionary forces down the road. Full speed ahead means there is no way to turn without capsizing the boat.
“There is also the risk that financial institutions that have problems in terms of profitability or fiscal soundness will make loans and investment without adequate risk valuation… I detect a vulnerability similar to that seen before the so-called VaR (Value at Risk) shock in 2003.”
A simpler way to put this is that deliberately creating a mismatch between value and risk also creates a bubble effect in assets and equities across the board.
Taken together, Mr. Sato is essentially saying that NIRP is gutting the baseline of economic growth, removing any chance to soften the blow when it comes, and is setting up wealth destruction across the board.
Japanese politicians seem to be taking the ball and running with it. A key policy chief of the opposition party is now calling for Prime Minister Abe and the BoJ to get rid of NIRP.
In particular, the new platform cites how these policies hurt savers, along with failure to boost inflation, boost wages, and a terrible crash in trade balances.
NIRP has now moved beyond economists and policy wonks, and the general public is becoming involved in the pushback.
What Does This Mean For The U.S.?
As one of the few major economies without NIRP, this means the U.S. is going to see some unprecedented effects.
We’ll continue to see debt, both government and corporate, in heavy demand. Yields will be suppressed as a result.
We’ll also continue to see the dollar remain strong, and inflows to the stock market boosting stock prices in spite of weak or shrinking revenue and sales.
Gerardo Del Real, the Outsider Club’s newest expert, is spot on on how this will pan out for us. Just last week, he had this to say, which bears repeating:
“So what to do? Understand that the big money, the portfolio managers, pension funds, and insurers cannot continue to invest exclusively in negative-yielding assets.
Understand that a trickle of the trillions they manage will work its way to the U.S. markets, the dollar, and gold. Not because they’re goldbugs, but because they will have no choice.
Understand that of those three options — the U.S. stock market, the dollar, and gold — gold is the smallest market most susceptible to the largest moves.
Within the gold market, the junior resource market — especially the junior gold companies — has been absolutely decimated, and provides the best risk-reward proposition.”
His analysis is already paying off for the charter members of his new service, Resource Stock Digest.
Already, they are up 67%, 47%, 20% with the remaining two positions up 15% and 12% respectively.
With the elite and everyday people just starting to band together, and the inevitable market forces just starting to pan out, there is a whole lot more to come.
In other words, it isn’t too late to take advantage of the situation.
