How to Protect Your Money Against Negative Interest Rates

Keith Fitz-Gerald Sep 16, 2016
12 

It’s official… the lunatics are running the asylum.

Former Fed Chair Ben Bernanke said earlier this week that policymakers should give some serious thought to negative interest rates.

I think HE ought to think about what that means for millions of investors.

I know I am.

That’s why we need to have a chat today about how you defend your money before it’s too late.

Here’s what you need to know.

Bernanke’s Comment Shows He Still Doesn’t Understand The Consequences of His Actions

Millions of investors haven’t wanted to believe it…

Legions of politicians have done their best to perpetuate it…

And Wall Street hopes you’ll never figure it out…

What’s “it?”

…lunatics really do run the asylum.

Most rational people change course when something is not working. They admit they’re wrong and move on.

But noooooo.

Not the Fed, and certainly not Ben Bernanke.

The former Fed Chairman, now a consultant to The Brookings Institution think tank, noted in a post recently that, “it would be extremely helpful if central banks could count on other policymakers, particularly fiscal policymakers, to take on some of the burden of stabilizing the economy during the next recession.”

Including “the possibility of using negative interest rates” which aren’t really so bad “if properly motivated and explained.”

Translation: the Fed is out of options, is looking to politicians to fix the mess they’ve created, and Bernanke thinks the rest of us are too stupid to understand what he’s talking about. Which is why somebody has to explain it to “us” – meaning you and me.

Thing is… we do understand, and very well at that.

Negative interest rates are bad no matter which way you cut them, and no matter how you try to justify them. Negative interest rates:

  1. Mean that companies and individuals are paid to borrow but charged to save – ergo  you’re penalized for trying to be responsible, and incentivized to go into hock.
  2. Are supposed to result in more lending that, in turn, boosts growth. In reality, negative rates squeeze profit margins for every lender, making them less willing to loan. Customers who would otherwise borrow simply withdraw their money in an attempt to preserve what they have and that, in turn, further depletes the deposit base that’s supposed to collateralize lending. Piles of cash are still kept at the bank, only people start keeping it in safe deposit boxes instead of accounts (where the banks can use it to their advantage).
  3. Force pension funds, institutional investors and individuals – especially individuals – into increasingly risky assets in a desperate search for yield. That’s like adding gasoline to a fire because it sets up another boom/bust situation and boosts the stock market yet fails to benefit the economy. This is why markets are near all-time highs today despite the fact that earnings are down, millions have left the work force for good, and millions more individuals are one paycheck away from financial oblivion… after the government has spent trillions!
  4. Undermine business confidence and decrease borrowing because savvy CEOs don’t want to risk their hard earned money at a time when the economy is so bad that the Fed has had to resort to negative rates. And,
  5. Create global protectionism that will cause geopolitical tension at a time when the world’s nations need to be working together in the name of mutual survival.

Now for the really sad part.

We’ve seen this playbook before, albeit decades ago with different actors. We’ve even got the t-shirt.

Think back to September 1931. That’s when Britain stunned the world by eschewing the gold standard, and in the process, caused the pound sterling to plummet more than 30%.

The severe devaluation gave Britain an exporting advantage, until a “me too” effect led other major exporters to take a hatchet to their own currencies. Of course, there’s no gold standard to abandon today like there was then, which is a major reason the media, legions of academics, and Ben Bernanke himself have such a hard time envisioning another currency war, even as it happens right in front of them.

Washington thinks the US dollar is a weapon when, in fact, there are huge swathes of the world that believe it’s a liability. Obviously, we can’t do anything about what Bernanke thinks – that’s a discussion for another time.

It Pays to Be Unconventional

What matters now is how you handle the situation and how to position your money for profits.

It might seem counter intuitive, but Bernanke’s comments and Yellen’s next moves dictate that you buy U.S. dollars.

Yes… buy.

Conventional wisdom is that you want to sell Uncle Sam’s greenbacks but that’s part of the same flawed economic modelling that got us into this mess.

There is not another currency in the world capable of absorbing the excess liquidity that would result from negative U.S. rates, so traders are going to flood into dollars. We’re simply the best looking horse in the glue factory and there’s nowhere else to go.

The easiest way to do this is to purchase an ETF like the PowerShares DB US Dollar Index Bullish Fund (UUP). If you’re already investing in U.S. companies you’ve got this covered indirectly, so the move I’m talking about here is really gravy.

Or, consider a choice like the Near-Term Tax Free Fund (NEARX) from US Global Investors. The play here is an investment in near-term municipal bonds with relatively short maturities. It’s a great “cash-alternative” for investors who can withstand a smidgen more risk… in dollars.

And, start nibbling into the Chinese Yuan with a choice like the WisdomTree Chinese Yuan Strategy Fund (CYB) which is a nice complement to any core investment strategy. China’s economy will become the world’s largest much sooner than most investors are prepared to realize and that means its currency, the Yuan, will break free.

If you’re skeptical like a lot of investors are about this last point, let me point out that the Yuan becomes part of the IMF’s Special Drawing Rights basket in less than a month. And that means it’s on track to becoming the world’s next reserve – a story that we’ve been following profitably for years.

I’ll leave it to you to decide whether that’s from Bernanke’s madness.

Or something else entirely.

Until next time,

Keith

12 Responses to How to Protect Your Money Against Negative Interest Rates

  1. Bob Krone says:

    The Mother of All Depressions is Nigh!

    • Keith says:

      Perhaps, Bob.

      Just don’t forget that self preservation is one of the most powerful of all instincts so there will be plenty of profits along the way.

      Best regards and thanks for being part of the Total Wealth Family, Keith:-)

  2. John says:

    Jim Rickards is telling everyone that September 30th is D-Day for the dollar and we will lose reserve status… if this happens then our dollar will crash! What is your thought on this?

    • Keith says:

      Hello John.

      Jim is obviously a bright guy but I think he is missing some key elements when it comes to how money actually works. For example, traders cannot sell the dollar en masse because there is not another currency capable of absorbing the liquidity. But another nation – like China – can and will introduce an alternative that will build up holdings as their national asset base expands.

      Currencies, to put it another way, are not a zero-sum game and never have been – reserve or not.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  3. Content Smith says:

    Are you saying that if the U.S. goes to negative rates the countries already there will lower further so we still look better comparatively? Why would that send UUP higher since they would be in the same relative position as they are now?

    • Keith says:

      Hello Content.

      Yes, that’s exactly what I am saying. Large swathes of the world may hate the United States but it’s the one currency they run straight to when trouble starts. Derivatives, bonds and industrial output will see to that for at least a while longer.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  4. Moe Chapman says:

    Thanks for caring for the whole person, including your readers’ financial welfare. Supplying the financial needs of our families is an integral portion of our responsibilities. Nevertheless, money alone rarely, if ever, brings deeply rooted contentment and profound peace to our lives. I applaud your professionalism, trustworthiness and sense of purpose which you exhibit in your life and work. Gratefully, Moe

    • Keith says:

      Hello Moe.

      Thank you for the kind words – you made my day!

      I will do the best I can to ensure the trust you place in me is deserved. To that end, if I can do anything better, please let me know!

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  5. Ivano says:

    Since the majority of investment advice..WSJ and others claim Hillary is the best bet for the stock market. Then I hope after she is elected by stock owning idiots… that like Roosevelt the she bands the ownership of gold. It worked to pull us out of the depression… so it needs to be repeated.

    • Keith says:

      Hello Ivano.

      A very interesting observation…just make sure you’re among the stock-owning idiots because there will be plenty of opportunity as the election plays out no matter who is “best.”

      Best regards and thanks for being part of the Total Weath Family, Keith 🙂

  6. John B. Schroeder says:

    Why not put enough money into a 3x inverse fund and calmly wait for the market to go over the cliff? One of them went past $100,000/sh. ! I’ve picked out my new car,and I’m calmly awaiting the money to pay cash for it!

    • Keith says:

      Hello John.

      No doubt that’s an attractive alternative and potentially a viable one, too. The trick is that any 3X fund has what they call tracking error built in. That’s the adjustment that has to be made to keep up with the constant time decay of the futures contracts underneath that works against you. Sometimes that’s as high as 4% a month which means a 3X fund is tricky to hold “until”…if that makes sense.

      Best regards and thanks for being a member of the Total Wealth Family, Keith 🙂

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