With the Greenback at a Two-Year High, Buy, Don’t Run, From the Stock Market
What would you do with your money if the Federal Reserve deposit rate was a negative 0.4%?
Sure, U.S. banks hardly pay anything these days, but at least they pay something, which is not the case for European banks that are suffering from NIRP-itis.
NIRP-itis? I’m talking about Negative Interest Rate Policy.
The European Central Bank’s deposit rate is negative 0.4%. So are the deposit rates for several other European central banks, such as Switzerland, Denmark and Sweden.
It's not just Europe. All around the world, some $15 trillion in government bonds have negative yields.
Worse, interest rates are likely to fall even farther …
ECB President Mario Draghi straight up told the world that interest rates will remain “at their present or lower levels” through 2020. He also suggested even more rate cuts.
"A significant degree of monetary stimulus continues to be necessary to ensure that financial conditions remain very favorable and support the euro area expansion."
Draghi has powerful contemporaries who feel the same way. The newest person to head the International Monetary Fund, Christine Lagarde, somehow feels that negative interest rates are a financial godsend for Europeans.
"On the one hand, banks may decide to pass the negative deposit rate on to depositors, lowering the interest rates the latter get on their savings.
"On the other hand, the same depositors are also consumers, workers and borrowers. As such, they benefit from stronger economic momentum, lower unemployment and lower borrowing costs.
"All things considered, in the absence of the unconventional monetary policy adopted by the ECB — including the introduction of negative interest rates — euro area citizens would be, overall, worse off."
This was my reaction, and could very well be yours too …
Somehow, some way, the people running the world’s central banks have convinced themselves that negative interest rates are a good thing.
But put yourself in a European money manager’s shoes. What would you do with the money under your control? Would you buy European bonds with a negative yield? Would you put your money into a European bank that charged you 0.4% to deposit it?
I sure wouldn’t.
What I would do is look for a developed country with positive interest rates and a country with a strong — not weak — currency.
Not only is the U.S. the only developed country with positive interest rates, the U.S. dollar is one of the strongest currencies in the world.
In fact, the U.S. Dollar Index (^DXY) is at a two-year high.
My point is simple: Money from all over the world is going to come gushing into U.S. bonds and U.S. stocks.
I say that because for the first time since March of this year, the yield on the S&P 500 is higher than the yield on the 30-year Treasury bond.
Nobody, including me, knows where stocks are heading in the near term. But I am very confident that the long-term direction of the stock market is higher because of the flood of foreign money that is going to gush into U.S. assets.
Buy, don’t run, from the stock market.
With all the volatility in the markets right now, and worried whispers of the next recession looming just around the corner …
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