Devalue or Die; Negative Interest Rate Wars Have Begun

By: Sol Palha | Mon, Feb 15, 2016
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Don't part with your illusions. When they are gone, you may still exist, but you have ceased to live. ~ Mark Twain

The "devalue or die" currency wars are picking up steam; Japan's central bankers are not alone when it comes to taking rates into negative territory. A host of European nations are now joining the bandwagon, and the latest victim is Sweden. We alluded to this development a long time ago and published a host of articles on this topic. Central bankers Worldwide understand that the only driving force behind the magical recovery in the U.S s hot money and that is the only weapon that can maintain that illusion. Get ready for negative rate wars; imagine having to pay the banks to keep your money; soon people will start to question the value of banks.

Sweden's central bank stated that they would continue to follow this path to achieve their targeted rate of 2% inflation in 2017. Our response is good luck dudes; this is not going to be possible for the velocity of money has dropped dramatically. You have to create money and put it into the hands of the masses to create chaos, oops we mean boom and bust cycles. This was the precursor to the subprime mortgage crisis of 2008.

What is velocity of money? Well as the term implies it is the speed at which money moves around. When an economy is healthy, money tends to move around quite rapidly as there is a lot of buying and selling. Sadly the opposite is occurring today; the velocity of money has been in free fall since the housing crisis. We will address this topic in more detail in a follow up article. The extremely low velocity of M2 money stock clearly illustrates that this economic recovery as we have so many times pointed out, is nothing but a hoax.

Sweden's central bank reduced to the repo rate to negative 0.50% from negative 0.35%. The Krona as expected dropped as that is really what the whole purpose of this exercise is all about. Competitive currency devaluations are here to stay, and there is a race to reach the bottom.

The majority of economists at Bloomberg and the Wall Street Journal were expecting a rate cut, but they were not expecting it to be so steep. In our opinion, this clearly confirms our long-standing argument that this entire economy recovery is nothing but one massive illusion.


Game Plan

When you keep flooding the markets with money, stocks rise and eventually the precious metal's sector will catch fire. We might be witnessing the first stages of the next bull market right now. It is too early for us to confirm that a bottom is in place as the minimum requirement would be a monthly close above $1200. We would avoid jumping into Gold stocks, but getting into Gold and Silver bullion right now could be construed as a good idea. The downside is limited as they are both trading well off their 2011 highs and both markets are extremely oversold.

Secondly, consider compiling a list of top-notch stocks and use the current correction to open position in these stocks. Our central bankers will join the negative interest rate party sooner or later. Look at the bond market it has rallied in the face of interest rate hike. In fact, it is trading at new highs as we speak. This is a signal that the Fed's hands are tied and that sooner or later it will have to join the "negative interest rate club". In this race to the bottom, resistance is futile.

 


 

Sol Palha

Author: Sol Palha

Sol Palha
TacticalInvestor.com

Sol Palha is a market analyst and educator who uses Mass Psychology, Technical Analysis and Esoteric Cycles to keep you on the right side of the market. He and his partners are on the web at www.tacticalinvestor.com.

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