from Casey Research.
Negative interest rates are spreading like a plague.
As you’ve
probably heard by now, many interest rates around the world have “gone
negative.”
Normally,
you earn interest on the money in a savings account. With negative rates, you
pay the bank to hold your money. In other words, negative rates turn savings
upside down. They basically “tax” the money in your account.
Negative
rates were unheard of for most of history. But, as you’re about to see, they’re
starting to take over the world.
In this
issue, we’ll tell you exactly what’s happening…and what to do about it.
• The European Central Bank (ECB) started
using negative rates two years ago…
The Bank of
Japan (BOJ) introduced them earlier this year. Denmark, Sweden, and Switzerland
have them too.
Today, $10
trillion worth of government bonds pay negative yields. That’s up from $6
trillion in February, a staggering 67% increase in just four months.
The Wall Street Journal reported
today that government bond yields in Japan, Germany, and the U.K. have just
fallen to record lows.
• Negative rates have even seeped into the
corporate bond market…
At least
$36 billion worth of corporate bonds have negative rates.
Iconic
American businesses Johnson & Johnson (JNJ), General Electric (GE), and
Philip Morris (PM) all have bonds trading with negative rates. So if you buy a
Johnson & Johnson bond today, you’re
essentially paying a fee to lend the company money.
• Central bankers said negative rates
would “stimulate” economies…
The idea is
that folks will spend more money if you “tax” their savings. According to
mainstream economists, this will grow the economy.
It hasn’t
worked.
Europe and
Japan are both growing at their slowest rates in decades. Their stock markets
are also doing poorly. The STOXX Europe 600, which tracks 600 large European
stocks, is down 12% over the past year. The Nikkei 225, Japan’s version of the
S&P 500, is down 16% since last June.
• Negative rates have backfired…
Folks
aren’t spending more money. They’re hoarding cash to avoid paying negative
rates.
In Japan,
sales of home safes have skyrocketed. According to Business Insider, safe sales are now at the
highest level since the 2008 global financial crisis.
Europeans
are doing the same thing. Business
Insider reported last week:
"Safe
sales have shot up through the roof in Europe," said Hickmore [portfolio
manager at Aberdeen Asset Management]. "People are taking cash out, and
even with security costs, it's better returns than your negative rates. It's
crazy, crazy behavior."
• Huge corporations have also gone to
extreme lengths to avoid negative rates…
German
insurance giant Munich Re recently pulled €10 million ($11 million) from its
account with ECB.
Munich Re
is the world’s second-biggest “reinsurer.” It insures insurance companies.
Like other
large European financial institutions, Munich Re keeps money with the ECB. This
arrangement used to make sense. Not anymore.
These days,
Munich Re has to pay €4 for every €1,000 it stores with the central bank for a
year. That’s because the ECB’s key rate is currently -0.4%. That might not
sound like much. But for Munich Re—which oversees about €231 billion—it adds up
quickly.
Munich Re
put the money it withdrew into other currencies and gold.
• This week, one of Germany’s largest
banks said it might soon do the same thing…
Reuters reported
on Wednesday:
Commerzbank,
one of Germany's biggest lenders, is examining the possibility of hoarding
billions of euros in vaults rather than paying a penalty charge for parking it
with the European Central Bank.
The company
made the announcement one month after it said negative rates were eating into
earnings. Its profits fell 52% during the first quarter.
Commerzbank
would become the first major European bank to take this step. We don’t think it
will be the last. According to the Financial
Times, negative interest rates cost German banks €248 million last
year.
• Negative rates are eating Europe’s banks
alive…
Spanish
banking giant BBVA’s (BBVA) profits fell 54% last quarter. First-quarter
profits at Deutsche Bank (DB), Germany’s largest bank, were down 58%. Swiss
bank UBS’s (UBS) profits plunged 64%.
Last week,
Deutsche Bank's CEO said it could continue to struggle as long as negative
rates are in place:
In the
banking world, we are currently struggling with negative interest rates.
We will
struggle more as the effect of those negative interest rates plays out into our
deposit books.
European
banks are now trading like they’re in a financial crisis. Deutsche Bank’s
shares have plunged 41% over the past year, and they’re down another 5% today
as we write. BBVA is down 37% since last June. UBS is down 25%.