It’s time to sit back, relax and enjoy a little joe …
Welcome to another rousing edition of Black Coffee, your off-beat weekly round-up of what’s been going on in the world of money and personal finance.
I hope everyone is enjoying their weekend! In the meantime, why don’t we get this show on the road? Then I can start mine …
Who’s dumb enough to bet that more liquidity and negative interest rates will magically work when zero interest rates didn’t move the needle?
— Charles Hugh Smith
The bond market in Europe is stripped of its job, which is to discover price and rates and to help calibrate our feelings and our calculations about financial risk. It’s dead.
— Jim Grant
Credits and Debits
Debit: Did you see this? A new study has found that found that almost 1 in 4 people have lied to a new partner about their debt. The survey also revealed that many adults are deceptive about their financial situations in general. Three in 10 admit they have lied about their annual salaries, and more than 25% said they have hidden their spending habits from partners. Imagine that.
Debit: I’ll bet it’s tough to lie about your financial situation if you live in the Big Apple. After all, it’s tougher than ever for those making less than six figures to reside there. Assuming a maximum rent-to-income ratio of 40%, solo renters in popular “affordable” Brooklyn neighborhoods now need to earn at least $100,000 per year to live there; and single Manhattan renters need a gross income of $115,800. Yikes.
Credit: Meanwhile, back in the Workers’ Socialist Paradise of Venezuela, the news is a mixed bag. The good news is the annual inflation rate tumbled to 34,900% from 224,900% at the end of last year. The bad news is it hasn’t slowed inflation as much as the rate of the bolivar’s decline. Huh. Well … maybe they can try lopping a few zeroes off their currency. Again. Or not. Forward, amigos!
Debit: Things are no better in Zimbabwe this year, where pay has risen 10% — but costs for essential services jumped 400%. The annual inflation rate there is now 558%; that’s more than three times the “official” government rate. I know. As a result, roughly 3 in 5 rural Zimbabweans are unable to afford enough food. Many years ago, Zimbabwe used to be “the breadbasket of Africa.” Then socialism reared its ugly head.
Debit: In other news … First it was Denmark, then Switzerland, and now Germany; this week their entire bond curve turned negative for the first time ever. For those wondering how negative interest rates work, here it is in a nutshell: You pay bankrupt governments for the “privilege” of lending them currency that they’re rapidly debasing. Heh. And if you think that makes sense, I’m sure you see nothing wrong here either:
Credit: And while negative rates have yet to reach America’s shores, financial analyst Joachim Fels says that, “US Treasuries may be no exception to the negative yield phenomenon. And if trade tensions keep escalating, bond markets may move in that direction faster than you think.” Quite frankly, negative rates are coming to the US, regardless, because they’re baked into the cake; reduced trade tensions will only delay the inevitable.
Debit: Of course, most of the world’s central banks have been pursuing a negative interest rate policy (NIRP) to encourage borrowing in a bid to counteract a chronic global economic malaise — but it’s no longer working because the global economy is debt-saturated. Unfortunately, trying to solve a debt problem with even more debt is akin to “helping” a man who fell into a well by giving him a shovel.
Credit: Macroeconomist Alasdair Macleod reminds us that, “There’s no evidence that negative rates work. And assuming the Chapwood index provides a reasonable estimate of annual purchasing power loss for the dollar, negative rates means the public and businesses could lose up to 15% of their wealth and earnings annually.” Sadly, that won’t stop bankers from trying. Most likely by charging a percentage fee on withdrawals.
Credit: For his part, financial analyst Bill Holter argues that, “Negative rates are a long-term impossibility and carry many unintended consequences; a snake on the Titanic eating its own tail. And the ship is engulfed by debt with absolutely no mathematical way to perform.” As a result, Holter says, “The point where central banks lost control is in the rear view mirror.” He may be right; but just to be sure … let’s go to the tape:
Credit: Mish Shedlock says the cause of the global economic malaise is no secret: “It’s the debt, stupid! The global economy is choking on debt as central banks are determined to have more of it. The bubbles are proof (of) inflation. The bond markets say something else is coming.” I agree; I suspect they’re telling us the end of our corrupt debt-based monetary system is fast approaching. Just how close is it? Only time will tell.
By the Numbers
Welcome to Crazy Town. “Investors” have now sunk more $15 trillion into negative-yielding bonds; that number has jumped $1 trillion in the last several weeks alone. Here’s a small sample of the latest 10-year government bond yields as of August 7:
-0.96% Switzerland
-0.60% Germany
-0.55% Denmark
-0.49% Netherlands
-0.37% Austria
-0.35% France
-0.34% Finland
-0.30% Belgium
-0.28% Sweden
-0.19% Japan
Source: MarketWatch
Last Week’s Poll Result
Will you close your savings accounts if the banks go to negative interest rates?
- Yes (71%)
- I’m not sure (20%)
- No (9%)
More than 1800 Len Penzo dot Com readers responded to last week’s question and it turns out more than 7 in 10 say they’ll close their savings account(s) if interest rates fall below zero. Only 1 in 11 say they will keep their savings accounts with their banks. Remember that, folks, when negative rates are finally imposed on savers. When it comes to bank runs, he who panics first, panics best.
The Question of the Week
[poll id=”280″]
Useless News: All Paid Up
It’s a rainy August afternoon at a resort town sitting next to the shores of a lake. It’s tough times, everybody is in debt, and everybody lives on credit.
The little town looks totally deserted.
Then a rich tourist arrives and enters the town’s only hotel. He places a $100 bill on the reception counter and heads upstairs to inspect the rooms.
While the tourist was upstairs, the hotel proprietor took the $100 bill and ran down the street to pay his debt to the butcher.
Then the butcher took the same hundy and immediately went next door to pay his debt to the pig raiser, who hurriedly ran off with the $100 bill so he could pay his debt to the supplier of his feed and fuel. The feed and fuel supplier, in turn, took the same Benjamin and used it to settle his debt with the town’s prostitute who, in these hard times, had provided her “services” on credit.
The hooker then ran to the hotel and handed the $100 bill to the hotel proprietor in order to pay for the rooms that she rented when she brought her clients there.
The hotel proprietor then laid the $100 bill back on his reception counter so that the rich tourist wouldn’t suspect anything.
At that moment, the rich tourist returned from inspecting the hotel rooms and took back his $100 bill because he didn’t like any of the available accommodations.
The rich tourist then promptly left town — so nobody earned anything.
However, the whole town was suddenly debt free, and looked toward the future with renewed optimism.
(h/t: hugin-o-munin)
Other Useless News
Here are the top — and bottom — five states in terms of the average number of pages viewed per visit here at Len Penzo dot Com over the past 30 days:
1. Connecticut (3.00 pages/visit) !!
2. Vermont (1.79)
3. Hawaii (1.71)
4. Arkansas (1.69)
5. Arizona (1.67)
46. Nebraska (1.22)
47. Delaware (1.21)
48. Illinois (1.19)
49. Nevada (1.15)
50. Alaska (1.03)
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Letters, I Get Letters
Every week I feature the most interesting question or comment — assuming I get one, that is. And folks who are lucky enough to have the only question in the mailbag get their letter highlighted here whether it’s interesting or not! You can reach out to me at: Len@LenPenzo.com
After reading the results of my latest brown bag sandwich price survey, Francis had this to say after reading that eggs at my local grocery store were selling for $2.32 per dozen last month:
Where the heck do you shop for eggs?
Um … Would you believe New Yolk City?
If you enjoyed this, please forward it to your friends and family. I’m Len Penzo and I approved this message.
Photo Credit: brendan-c
Hi Len,
It looks like gold is beginning to flash a warning that the system is in distress. Waiting for my silver to catch up. It sure is taking its time!
Have a great weekend!
Sara
Silver’s day in the sun will come, Sara. And the moves will far surpass those seen in gold.
I don’t get it. There MUST be a reason why people buy bonds with negative rates. People can’t be THAT stupid, can they?
If they hold the bonds to maturity, then they lose principal — never mind the additional negative effects of inflation. However, if they sell the bond before maturity (assuming yields continue falling), then they make a profit. It’s the “greater fool” theory at work.
“… negative rates means the public and companies could lose up to 15% of their wealth and earnings annually.” – Alasdair Macleod
“If a company has pricing power, it really doesn’t matter what currency is used to pay them” – Warren Buffet
Buffet’s way simply has a company inflating its prices along with the the currency, while Macleod has them losing income and earnings.
It all depends on a particular company’s financial power, as Buffet recognizes.
Individuals within “the public” can also have “pricing power”!
For example, those who own forested land where the trees continue to grow and their girth and therefore their value increase independently of timber prices, or precious metals which store wealth, regardless of price fluctuations.
Even as consumers, those who grow some of their own supplies such as food and fuel, needn’t care about the market price of those supplies.
Agree, Dave. For those who lack other forms of wealth protection, having the means to provide a product/commodity that the public demands is another way to keep living standards at least stable during periods where the currency is rapidly devaluing.
Re: last week’s poll question
I’m certain the 20 percent who aren’t sure they’d pull their money out of the bank if rates go negative will be quickly changing their minds if the 70 percent who say they will pull their money out follow thru on their promise!
You got that right, DK. The fear factor is a powerful force.
Len, I can’t wrap my head around that story about the resort town and the $100 bill being passed around! Can you explain that for me?
No wealth was created in the example. All of the products and services were also valued equally. Finally, it is a closed loop environment. There was no profit involved. In essence, all of the players in the story essentially bartered their products or services.
This doesn’t seem right. That initial $100 bucks belonged to the guest. At the end it goes back to the guest but as a deduction from the Hotel. So everyone’s debt gets paid off but the Hotel is out $100. I might be wrong. But you need to show the work. LOL
As I noted before, Alex. The story illustrates a closed loop and there was no wealth created or profit realized — this turns all of the exchanges into pure barter. You’re right, ultimately one person was left holding the bag because credit was issued at the origin, which was the initial exchange between the prostitute and the feed supplier. Let’s play it out:
The prostitute extends $100 of credit for her “services” to the feed supplier.
The hotel owner extends $100 of credit to the prostitute for the hotel room.
The butcher extends $100 of credit to the hotel owner for the pork.
The farmer extends $100 of credit to the butcher for the pig.
The feed supplier extends $100 of credit to the farmer for the pig food.
Again, no wealth was created. So who is left holding the bag? You tell me:
The hotel owner received pork.
The butcher received a pig.
The farmer received feed.
The feed supplier received an evening with the prostitute.
The prostitute received a hotel room for a few hours so she could share an evening with the feed supplier.
If you ask me, I’d say the prostitute is the one left holding the bag — as she essentially gave her “services” away for nothing more than a temporary stay in a hotel room. Then again, she is the one who got the ball rolling in the story by extending the credit.
By the way, the US dollar is not money either — it’s credit. An IOU.
“single Manhattan renters need a gross income of $115,800”
yea, and for that you will get 400 sq ft at best. no thanks
Yeah, Peter. I’m with you. I’ve seen some examples of what you can get in NYC for the price and it is extremely depressing. I would never want to live such a cramped lifestyle.
Gold is really signalling the future this week. My dealer friends and I can usually count on price jumps in au/ag to have people selling. There has been none of that with the run up to $1500 gold. Zero selling. Anybody that’s still waiting to get some insurance had better get on board soon.
I think you’re right, Ed. Gold is definitely on the march and this time the upward action feels different, unlike the previous six years when every upward lurch was quickly beat down into submission. Now, every pull back is being met with more buying.
” … roughly 3 in 5 rural Zimbabweans are unable to afford enough food. Many years ago, Zimbabwe used to be the breadbasket of Africa. Then socialism reared its ugly head…”
Besides Socialism, (“Vote for me and I will give you everything for free!”) being eagerly embraced by the Zimbabweans, they simultaneously drove out the successful and productive farming class by beating them, kidnapping them, murdering them, raping their women, “appropriating” their land and turning the farms over to people who have still not learned how to produce crops as abundantly as the previous group of farmers. Those people who were not murdered by the Zimbabweans have been mostly welcomed by other countries to which they decamped, bringing their skills and work ethic with them to the new lands which appreciate them.
Yes, Karen. And a nearly-similar scenario is playing out now in South Africa.